Appeals Court Okays Direct Suit Against Condo Association in Bylaw Case

By Joe Forward, Legal Writer, State Bar of Wisconsin

May 25, 2012 – In a case of first impression, a state appeals court has ruled that the members of a non-stock condo association who sought class certification to challenge the association’s yearly assessments have a direct, not derivative, claim against the association.

Four of the approximately 1,602 voting members of Lake Arrowhead Association asserted an individual claim for declaratory judgment construing the association’s bylaws, which included covenants governing the residential properties owned by association members.

The covenants allow the association to collect annual assessments, which vary depending on the type of lot owned. Those owning two or more contiguous residential lots must pay one-fourth more in yearly assessments than other residential property owners. But the plaintiffs argue that the association bylaws don’t allow the association to charge them more.

The circuit court dismissed the action, along with the motion for class certification, because the plaintiffs did not file a derivative claim. However, the District IV Court of Appeals reversed in Guenther v. Lake Arrowhead Association Inc., 2011AP113 (May 24, 2012).

In general, shareholders of a corporation must file derivative claims to enforce a right that belongs to the corporation. “A ‘right of action’ that belongs to a corporation cannot be brought as a direct claim by an individual shareholder,” the appeals court explained.

The appeals court ruled that Wisconsin’s corporate law governing non-stock corporations did not require the plaintiffs to file a derivative claim. Specifically, it interpreted Wis. Stat. section 181.0740, defining derivative proceedings, in favor of the plaintiffs.

“Because the [plaintiffs] each have a right as an individual to pay no more in assessments than the bylaws authorize, they each suffer a direct injury as an individual if they pay more than the bylaws authorize,” wrote Judge Margaret Vergeront for the three-judge panel.

The court rejected the association’s argument that an incorrect bylaw interpretation would injure the association as a whole, or that the association was protected by the business judgment rule, which limits judicial review of corporate decision-making.

“We clarify here that the business judgment rule is not relevant to deciding whether the [plaintiffs’] claim is derivative or direct,” Judge Vergeront wrote.

The appeals court remanded the case to determine the merits of the plaintiffs’ motion for class certification. The court also explained that the state’s joinder rule, section 806.04(11), did not require the circuit court to dismiss the case for failure to join all parties with an interest in the case, noting that the circuit court could permit an amendment to the complaint.

“[T]he circuit court on remand will have the opportunity to more fully consider these matters and exercise its discretion accordingly,” the judge wrote.