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New Jax Condominiums Association, Inc. v. Vanderbilt New Orleans, LLC

Court of Appeals of Louisiana, Fourth Circuit

April 26, 2017

NEW JAX CONDOMINIUMS ASSOCIATION, INC.
v.
VANDERBILT NEW ORLEANS, LLC, AND THE PENTHOUSE AT JAX, LLC

         APPEAL FROM CIVIL DISTRICT COURT, ORLEANS PARISH NO. 2015-04267, DIVISION "E" Honorable Clare Jupiter, Judge

          Ryan M. McCabe Charles L. Stern, Jr. Elise M. Henry COUNSEL FOR PLAINTIFF/APPELLEE.

          Vincent James Booth BOOTH & BOOTH, A PLC COUNSEL FOR DEFENDANTS/APPELLANTS.

          Court composed of Judge Roland L. Belsome, Judge Joy Cossich Lobrano, Judge Regina Bartholomew-Woods

          JOY COSSICH LOBRANO, JUDGE

         This appeal arises from a dispute between condominium unit owners and their condominium association regarding the operation of short-term rentals. Vanderbilt New Orleans, LLC ("Vanderbilt"), The Penthouse at Jax, LLC ("PAJ"), and New Jax, LLC ("New Jax") appeal the district court's November 10, 2015[1]judgment granting New Jax Condominiums Association, Inc. ("the Association")[2]a permanent injunction against PAJ, Vanderbilt, and New Jax, (together, "the Weber entities") and adjudicating the Weber entities liable in solido for $250, 991.24 in damages. Finding that the district court did not manifestly err, we affirm the portion of the judgment issuing a permanent injunction against the Weber entities. Finding that the district court erred in adjudicating New Jax liable in solido for damages with PAJ and Vanderbilt, we reverse and vacate the portion of the judgment awarding monetary damages and remand the case for a determination of the amount of damages owed by PAJ and Vanderbilt.

         Earl Weber Jr. ("Weber") is the sole member of PAJ, and makes all operational decisions for PAJ. PAJ owns two units in the condominium complex managed by the Association, one of which (the "Queen Suite") it uses for short-term rentals. Weber is also a member of Vanderbilt, and makes the majority of decisions regarding Vanderbilt's operations. Vanderbilt conducts no business other than owning a condominium in the Association's complex ("Unit B") and engaging in short-term rentals through Unit B. Weber is also one of the two members of New Jax, and, at all times relevant to the issues raised in this appeal, was the individual directing the operations of New Jax. New Jax was formed to act as developer of the condominium complex, and went dormant for a period after the complex was completed.

         In 2009, PAJ and Vanderbilt began leasing the Queen Suite and Unit B on a short-term rental basis. Four years later, in January of 2014, a new president, A.J. Roy ("Roy") was elected to lead the Association's board of directors (the "Board"). During his tenure, Roy received numerous complaints regarding the operation of short-term rentals within the condominium complex. These complaints included that short-term tenants had harassed unit owners, had trespassed into unit owners' homes, and had provoked violence that prevented unit owners from being able to use and enjoy their property. As a result, the Board met with Weber. However, the short-term rentals continued.

         After the meeting failed to produce favorable results, on June 30, 2014, the Board unanimously recognized that short-term rentals were prohibited by law. The Board then circulated a letter to all owners within the complex, stating that short term rentals were prohibited by law[3] and not tolerated by the complex. The letter specifically stated that "all Unit Owners must stop using their units for rentals for periods of less than 60 days" and that "all Unit Owners must stop using their Units for rentals for periods of less than 60 days by September 16, 2014." Vanderbilt and PAJ admit that they ignored the letter and continued with short term rentals.

         Another notice was sent. Throughout this time, the Board continued to receive complaints with respect to issues concerning short-term tenants. As a result, the Board unanimously approved an amendment to the bylaws ("Bylaw 5.19") specifically prohibiting the operation of short term rentals within the complex, and set it for a vote by the unit owners. Before Bylaw 5.19 was voted upon by the unit owners, Weber had Vanderbilt lease the Queen Suite and Unit B to his previously dormant company, New Jax, for the purpose of continuing the short-term rentals.[4] Weber signed the lease for both lessor Vanderbilt and lessee New Jax. The lease became effective January 1, 2015.

         On January 15, 2015, a unit owner meeting took place. Before a vote was held with respect to Bylaw 5.19, an annual election of the Association's three-member board of directors (the "Board") was held. Mr. Kenneth Lobell ("Lobell")[5] and Mr. Gregory Lala ("Lala") were elected as new members of the Board. Roy was reelected to the Board, and remained president. Initially, Bylaw 5.19 did not pass. There was some confusion regarding the vote, as Lobell stated that he filled out his ballot incorrectly. After alerting the room that he incorrectly filled out his ballot, Lobell was allowed to clarify his vote, which resulted in the new bylaw passing.[6] The final result was a 75.5810% majority in favor of Bylaw 5.19, which reads:

It is strictly prohibited that any Unit Owner or tenant (pursuant to a duly authorized and approved lease) use his/hers/its Unit for any overnight rental, bed and breakfast, guest house, hotel, or transient purpose in which any party received payment or anything of value for said use. The Unit Owner and tenant/occupant breaching this provision, after notice and a hearing before the Board, shall be liable jointly, severally, and in solido to the Association for all amounts received or the value received, costs, expenses, and legal fees, all of which shall be subject to the imposition of a lien as provided in the Declaration and By-Laws and the Act. In addition to the above, the Association shall be entitled to injunctive relief against any violating party.

         After the passage of Bylaw 5.19, it came to the Board's attention that the Weber entities were still operating short-term rentals. On March 9, 2015, the Board issued a written notice to PAJ and Vanderbilt ordering them to cease their operation of short-term rentals, and scheduled a hearing for March 27, 2015, to discuss violations of Bylaw 5.19. During the hearing, Vanderbilt admitted that it had used its property for short-term rentals, but argued that it had not violated any bylaws. Instead, Vanderbilt asserted that prior to January 1, 2015, it had complied with the notice requirement for short-term leases, pursuant to Article 5.18.[7] Furthermore, Vanderbilt maintained that its long-term lease agreement with New Jax was not subject to the bylaws and/or was protected by the "developer exclusion" in Article 5.18. However, despite these arguments, the Board unanimously determined that PAJ and Vanderbilt had violated and were continuing to violate Bylaw 5.19, and therefore, ordered PAJ and Vanderbilt to cease and desist from using their units for short-term rentals. Despite this, New Jax continued to use its leased property for short-term rentals.

         Because of these continued actions, the Association filed a lawsuit seeking an injunction and damages against PAJ and Vanderbilt. A preliminary injunction was issued on June 25, 2015, enjoining PAJ and Vanderbilt from continuing their short-term rentals. Importantly, the preliminary injunction also restricted "those persons in active concert or participation with them" from operating the short term rentals. The Weber entities ignored the injunction, and New Jax continued to use its leased property for short-term rentals.

         New Jax intervened in the lawsuit on July 21, 2015. On August 12, 2015, the Weber entities filed an Exception of Prescription, alleging that the lawsuit was untimely because the Association had been aware of Vanderbilt's short-term rental actions since 2009. The district court denied the exception, and the matter went forward to trial on November 9 and 10, 2016. On November 10, 2016, the district court rendered judgment. The district court found that the Weber entities were in violation of Bylaw 5.19, and ordered a permanent injunction barring the Weber entities from participating in any short-term rental activity. The district court also found that damages for the Weber entities' violation of Bylaw 5.19 amounted to $250, 991.24, equal to the amount of revenue that the Weber entities earned from the operation of short-term rentals dating from January 15, 2015 to September 14, 2015. The district court adjudicated the Weber entities liable in solido for those damages.[8]

         This appeal timely follows.

         Errors Assigned by PAJ and Vanderbilt

         I. Conflict of Interest

         First, PAJ and Vanderbilt allege that the district court erred by failing to make a factual finding that members of the Board had conflicts of interest that made the Board's actions improper. PAJ and Vanderbilt argue that because Lobell is involved in separate litigation against Weber, and Lala has stated that Weber made misrepresentations to him when selling him his condominium, [9] Lobell and Lala acted in bad faith by participating in the enactment and enforcement of Bylaw 5.19.

         In support of this argument, PAJ and Vanderbilt cite only La. R.S. 12:1-830(A), which reads, "[e]ach member of the board of directors, when discharging the duties of a director, shall act in good faith and in a manner the director reasonably believes is in the best interests of the corporation." PAJ and Vanderbilt further argue that "[t]he evidence in the record shows clearly that both Kenneth Lobell and another current member of the Association's Board of Directors, Gregory Lala, had conflicts of interest regarding Earl Weber and his short-term rental activity, and therefore acted in bad faith…."

         Regarding conflicts of interest, La. R.S. 12:1-861 reads:[10]

A. A transaction effected or proposed to be effected by the corporation, or by an entity controlled by the corporation, may not be the subject of any form of relief, or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if it is not a director's conflicting interest transaction.[11]
B. A director's conflicting interest transaction may not be the subject of equitable relief, or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if any of the following conditions are satisfied:
(1) Directors' action respecting the transaction was taken in compliance with R.S. 12:1-862 at any time.
(2) Shareholders' action respecting the transaction was taken in compliance with R.S. 12: 1-863 at any time.
(3) The transaction, judged according to the circumstances at the relevant time, is established to have been fair ...

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