Fines are Fine but Penalties are NOT in South Carolina
Until very recently, the question of the authority of a homeowners association to fine its members had never been squarely addressed by a South Carolina appellate court. That changed this past summer when the South Carolina Court of Appeals decided Brown v. Spring Valley Homeowners Association, Inc. In that case, the only authority for fining association members in the Spring Valley community was found in that association’s unrecorded bylaws. The Spring Valley court decided that this was enough to give the Association the authority to impose fines for two reasons. First, the court concluded that voluntary associations have the authority to fine their members under both the South Carolina Nonprofit Corporation Act and common law. Second, while the owners might not have expressly agreed to the association’s bylaws or articles of incorporation, they did accept a deed to property that was subject to recorded covenants which required them to become members of the Spring Valley HOA and to abide by that association’s rules, regulations and bylaws. The court found that “the restrictive covenants indirectly authorize the imposition of fines” and the “rules, regulations, and bylaws … constitute the contract between the Association and its members.”
Spring Valley is certainly good news for SC associations. It is important to remember, however, that Brown v. Spring Valley is an “unpublished” case. This means that the opinion does not establish a legal precedent, and a South Carolina court is not legally bound to follow it. Even so, this is the first indication we’ve had regarding how a SC court is likely to view these issues, and that initial indication is very positive. It is especially encouraging for communities that do not have any fining authority in their recorded covenants or master deed but may have (or obtain) fining authority in their unrecorded bylaws, rules or regulations.
The court’s decision that the relationship between the Association and its members is contractual directly influenced the way it analyzed the fines the Association imposed. The court treated association fines not as penalties to compel compliance but rather as “liquidated damages” in a contract. Without going too far down the legal rabbit-hole, the key point is that “liquidated damages” – which are essentially damages that contracting parties agree to at the point of contract formation – must be reasonable and may NOT operate as an unenforceable “penalty.” The Spring Valley court’s treatment of fines as liquidated damages is a bit surprising and unorthodox (at least to many of us who practice in this area). The court itself acknowledged that the term “fine” used by the Association is synonymous with the term “penalty” but went on to say that “this word choice should not control the analysis.” Since this is the way the court is choosing to analyze fines, we must do so as well!
In finding that the Spring Valley fines were reasonable and not an unenforceable penalty, the court focused on the fact that the fine policy at Spring Valley (found in the Association’s rules and regulations and not in the bylaws) included an opportunity for the violator to cure the violation without any fines at all and established a maximum annual fine amount of $1500. The court concluded that such fines were a “reasonable, if not modest, estimate of the damages likely to be sustained by the Association from a violation,” and that Spring Valley’s fine structure was not “disproportionate to any probable damage” that the association sustained as a result of the violation and demonstrated “an intent to compensate for a violation’s effects on the Spring Valley Community.” NOTE: The violation in Spring Valley was the owner’s unauthorized placement of a “For Sale” sign in violation of the recorded restrictions. The court found that $1500/year was not disproportionate to the harm suffered by the association, taking into account the association’s attorneys’ fees and the possibility that home values were negatively impacted by the owner’s violation.
The leadership of all South Carolina associations would be wise to consider Spring Valley carefully and take some proactive steps to follow the guidance it provides. First, SC associations must adopt a specific fine structure/policy as part of their bylaws or rules and regulations if they do not have one already. Second, they must establish and publish a schedule of fines for specific infractions/violations, and set the amounts in proportion to the harm the association will likely suffer as a result of the infraction/violation. While Spring Valley does not indicate that the relationship between the amount of the fine and the amount of the harm must be exact, it’s clear that an association maximizes its chances of success if the Board can articulate a good faith basis for the amount of a given fine. Third, the Spring Valley court placed a great deal of weight on the fact that the Spring Valley fine policy included a reasonable opportunity to cure without fines accruing, as well as a maximum annual fine amount. Accordingly, SC associations might want to take a hint from the Court of Appeals and incorporate both of these components into any published fine structure/policy.
One final and important point on collection of fines after Spring Valley. The Spring Valley HOA was NOT permitted to file a lien to collect unpaid fines because the court determined that the authority to lien extended only to unpaid assessments and not to unpaid fines. Specifically, the court noted that the “restrictive covenants provide that any unpaid periodic assessments for maintenance and repair of common areas shall constitute a lien upon [a member’s] property” but “there is no similar provision for unpaid fines in any of the Association’s governing documents.” The court did not say whether the authority to file a lien to collect fines must be in the recorded covenants or may be found in the Association’s bylaws or its rules and regulations. Bottom Line: Before your association files a lien to collect unpaid fines, be sure to review your documents carefully (or ask us to help you do so) to make sure that your association has the authority you need in order to collect unpaid fines through lien and foreclosure.
If you are a property manager or Board member with concerns about your community’s fine process (whether you’re in North Carolina or South Carolina) give us a call so we can arrange a time to consider your governing documents and discuss ways in which they might be improved to make sure your ability to levy and collect lawful fines is as strong as it can be.
Please contact Stephen C. Sellers if you have any questions about this post.