Appeals Court Okays Direct Suit Against Condo Association in Bylaw
Association members who challenged assessment provisions in corporate
bylaws can proceed individually, rather than through derivative
proceedings, an appeals court recently ruled.
By org jforward wisbar 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
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.