On appeal from the Superior Court of New Jersey, Law Division, Warren County, WRN-188- 99.
Before Judges Wefing, Cuff and Lefelt.
The opinion of the court was delivered by: Wefing, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: December 11, 2000
Plaintiff owns a home in Panther Valley, a private common- interest residential community in Warren County. Defendant Panther Valley Property Owners Association (Association) is a non-profit corporation that was organized in 1968 for the purpose of governing the community. The Association acts through an elected Board of Trustees; the individual defendants are members of the Association's Board. Plaintiff, as a result of her home ownership, is a member of the Association.
In October 1998, the Association, through a vote of its membership, adopted six amendments to the community's Declaration of Covenants and Restrictions (Declarations) and the Association's bylaws. Plaintiff filed suit challenging five of those amendments. The trial court upheld three of the amendments and struck down two. The parties appeal and cross-appeal from the trial court's judgment. After a careful review of the entire record in light of the arguments advanced on appeal, we affirm in part and reverse in part.
The first of these amendments declared, in substance and effect, that no individual registered as a Tier 3 offender under N.J.S.A. 2C:7-8(c)(3) ("Megan's Law") could reside in Panther Valley. Tier 3 is the highest classification within Megan's Law. In order for an individual to be classified as a Tier 3 registrant, that individual must be a sex-offender who has been deemed to pose a high risk of re-offending. Factors that inform the decision whether an individual poses a high risk of re-offending include whether the conduct involved repetitive and compulsive behavior, N.J.S.A. 2C:7-8b(3)(a); whether the individual served the maximum term of confinement, N.J.S.A. 2C:7-8b(3)(b); and whether the sexual offense was committed against a child, N.J.S.A. 2C:7-8b(3)(c). Because such an individual poses a substantial risk to the community, the statute directs that notification of the presence of a Tier 3 offender within the community be more widespread than that provided in the instance of a Tier 1 or Tier 2 offender, who have been deemed to pose low and moderate risks of re-offending. The trial court upheld the amendment precluding such Tier 3 registrants from residing within Panther Valley.
The second amendment authorized the Association to file with the Warren County Clerk a "Notice of Continuing Violation" if a member persisted in violating Panther Valley's Declaration or the Association's bylaws or rules. The trial court concluded that amendment was invalid because it did not require the Association to give notice to a member before filing such a Notice.
The third amendment provided that an owner could be liable for the Association's counsel fees and costs if the Association were required to file suit to enforce the Declaration, its bylaws or rules. The trial court struck down that amendment.
The fourth amendment set forth a procedure governing a member's inspection of the Association's books and records. The trial court concluded the amendment was facially valid.
The fifth amendment established minimum qualifications for members who wished to be elected to the Association's Board of Trustees. The trial court again concluded the amendment was facially valid.
The threshold issue to be determined is the proper standard governing judicial review of these amendments. It is important to note that plaintiff's challenge to the validity of these amendments does not revolve around the manner in which they were adopted, e.g., compliance with procedural requirements. Rather, her challenge is directed to the substance of the amendments themselves.
Plaintiff contends in essence that the amendments should be measured under a test of reasonableness. She asserts that each of these amendments fail that test. She maintains that each of these amendments represents a diminution of her ownership rights and, in consequence, is invalid. Defendants, on the other hand, assert that the amendments should be analyzed under what is termed the business judgment rule to determine if they are authorized by statute and the applicable documents governing the parties' relationship and to see if they violate any constitutional or statutory provision or conflict with public policy; defendants assert the amendments are entitled to a presumption of validity. According to defendants, each of these amendments represents an authorized action by the membership.
There is no reported case in New Jersey which clearly resolves the question of what standard a reviewing court should employ in such a context, where the membership has voted to amend the community's Declaration and the Association bylaws. Other reported cases in New Jersey which have considered such amendments have, generally, arisen following action by the community's board of trustees. See, e.g., Thanasoulis v. Winston Towers 200 Ass'n, 110 N.J. 650 (1988), in which the Court struck down two amendments to the association's rules and regulations adopted by the board. In Siller v. Hartz Mountain Assocs., 93 N.J. 370, 382 (1983), in the context of a suit by individual unit owners to prevent settlement between the condominium developer and the condominium association of claims related to alleged defects in construction, the Court spoke of the association's board occupying a position analogous to a corporation's board of directors. Perhaps the clearest explication of the business judgment rule is contained in Papalexiou v. Tower West Condominium, in which individual unit owners challenged the authority of the board to levy a special emergency assessment upon the membership. In upholding the assessment, the court said:
The refusal to enforce arbitrary and capricious rules promulgated by governing boards of condominiums is simply an application of the "business judgment" rule. This rule requires the presence of fraud or lack of good faith in the conduct of a corporation's internal affairs before the decisions of a board of directors can be questioned. If the corporate directors' conduct is authorized, a showing must be made of fraud, self-dealing or unconscionable conduct to justify judicial review. . . .
Although directors of a corporation have a fiduciary relationship to the shareholders, they are not expected to be incapable of error. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties. Courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence. [Papalexiou v. Tower West Condo., 167 N.J. Super. 516, 527 (Ch. Div. 1979) (citations omitted).]
In Chin v. Coventry Square Condominium Ass'n, 270 N.J. Super. 323 (App. Div. 1994), we considered amendments to the association's bylaws. It is not possible to tell from the opinion whether the challenged amendments were passed by the association's board or the membership as a whole. In our decision, however, we noted the existence of these two tests and concluded that the challenged amendments could not withstand scrutiny even under the business judgment rule. 270 N.J. Super. at 329.
We pause first to note the unique nature of Panther Valley. It is a gated residential community located within the Township of Allamuchy; it is comprised of more than 2,000 homes, including single-family homes, townhouses and condominium units. State v. Panther Valley Prop. Owners Ass'n, 307 N.J. Super. 319, 322 (App. Div. 1998) (holding that the Association, having asked the Warren County Prosecutor to assume jurisdiction to enforce the provisions of Title 39 over its private roads, lacked the authority to impose independent fines upon its members who committed traffic violations within its borders). The development itself, in light of the mix of ownership types, is not a condominium development but is more properly referred to as a "common interest development." Id. at 327. The Association as a whole is thus not subject to the terms and provisions of the Condominium Act, N.J.S.A. 46:8B-1 to -38, Id. at 328, for only "[a] small minority of the units are governed by the Condominium Act." Id. at 327. In certain contexts, however, the condominium statute may be considered "instructive" and looked to for guidance. Id. at 332.
Although Justice Schreiber noted in Siller that there is some authority for the proposition that condominium ownership existed as long ago as ancient Rome, Siller, supra, 93 N.J. at 375, n. 4, such common interest developments are generally considered a relatively recent phenomenon. Carl B. Kress, Beyond Nahrstedt: Reviewing Restrictions Governing Life in a Property Owner Association, 42 UCLA L. Rev. 837, 842 (1995), (hereinafter Kress). Common interest developments are the fastest growing form of housing in the United States. Armand Arabian, Condos, Cats, and CC&RS: Invasion of the Castle Common, 23 Pepp. L. Rev. 1, (1995), (hereinafter Arabian). New Jersey is among the states in which residential community associations are most common. David J. Kennedy, Residential Associations as State Actors: Regulating the Impact of Gated Communities on Nonmembers, 105 Yale L.J. 761, 793, n. 24 (1995), (hereinafter Kennedy). The law governing the relationships among an association, its board and its members has been described as being "in its infancy, or at best early adolescence. . . ." Stewart E. Sterk, Minority Protection in Residential Private Governments, 77 B.U. L. Rev. 273, 307 (1997). One indication that the courts are, indeed, grappling with new concepts is the split that exists in the different approaches of different jurisdictions.
California, for instance, has adopted the "reasonableness" test, Nahrstedt v. Lakeside Village Condominium Ass'n, 878 P.2d 1275 (Cal. 1994), while New York has adopted the "business judgment" rule. Levandusky v. One Fifth Avenue Apartment Corp., 553 N.E.2d 1317 (N.Y. 1990). Some courts and commentators recognize a distinction between considering original recorded restrictions, i.e., those extant at the time of purchase, and later-adopted ones. Ridgely Condo. Ass'n v. Smyrnioudis, 660 A.2d 942, 948 (1995), aff'd 681 A.2d 494 (Md. 1996); Sterk, supra, 77 B.U. L. Rev. at 338-39. Other cases turn upon whether the restriction at issue was improperly incorporated in the association's bylaws, rather than the community's underlying ...