Goddard v. Fairways Development General Partnership
1993 S.C. App. LEXIS 1, 426 S.E.2d 828, 310 S.C. 408 (1993)
Rule of Law:
Developers of planned unit developments (PUDs) stand in a fiduciary relationship to villa owners, analogous to corporate promoters, requiring them to act in good faith and with due regard to the interests of those relying on them, especially during the formation of the homeowners association and conveyance of common areas.
Facts:
- Fairways Development General Partnership (Developer) began developing a Planned Unit Development (PUD) in the early 1980s, envisioning approximately 90 villas.
- The PUD's "Declarations of Covenants, Conditions and Restrictions" granted superior voting rights to the Developer until virtual completion and established the "Fairway Villas Homeowners Association" (Association) with mandatory membership to own and maintain common areas funded by assessments.
- Only five villas were built, with the last one completed in 1982.
- In June 1982, the Developer executed a deed conveying most common areas to the then-nonexistent Association, which was delivered to the Developer's attorney but not filed.
- The Developer incorporated the Association in April 1984.
- In February 1987, after all five villas were sold, the Association held its first meeting, and the Developer filed the deed conveying common areas to the Association on the same date.
- At the Association's second and last meeting in March 1987, Ullman was elected president, and the Developer announced the Association would assume maintenance responsibilities for the common areas, which the Developer had previously maintained at its expense.
- With only six lot owners subject to assessments, the current funds are inadequate to maintain the common areas, and the Developer has refused to pay assessments proportionate to its superior voting power or consent to dissolution of the PUD without Ullman's consent.
Procedural Posture:
- Appellants (villa owners) initiated an action in the master-in-equity court, seeking, among other things, dissolution or reformation of the planned unit development (PUD) and other relief.
- The master-in-equity dismissed Ullman as a party defendant.
- The master-in-equity refused to dissolve or reform the PUD and denied the appellants other requested relief.
- Appellants filed a Rule 59(c) post-trial motion with the master-in-equity, which was denied.
- Appellants appealed the master-in-equity's order to the Court of Appeals of South Carolina.
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Issue:
Does a developer of a planned unit development (PUD) owe a fiduciary duty to the villa owners regarding the proper organization of the homeowners association and the condition of common areas at the time of their conveyance to the association?
Opinions:
Majority - Cureton, Judge
Yes, a developer of a planned unit development (PUD) owes a fiduciary duty to villa owners regarding the proper organization of the homeowners association and the condition of common areas at the time of their conveyance to the association. The court established a corollary between promoters of a corporation and developers of a PUD, both of whom are entrusted by interested investors to bring about a viable organization. Therefore, developers are fiduciaries to the villa owners, obligated to use good judgment and act in utmost good faith to complete the formation of their organizations and ensure common areas are conveyed in good repair with adequate funding. The court found it unfair for the Developer to burden villa owners with substandard common areas requiring immediate expenditure without a plan or reserve fund. While the court noted the Developer's decision not to raise assessments after the Association's formation was in deference to the villa owners' wishes and potentially subject to the business judgment rule, it remanded the specific issue of the Developer's pre-organization fiduciary duty regarding the condition and funding of common areas. The court also affirmed the master's decision regarding the PUD's dissolution, as Ullman, an indispensable party whose property interests would be affected, opposed it and had been dismissed without objection. Additionally, the court found the appellants waived their right to a jury trial on equitable issues by failing to immediately appeal the order of reference.
Analysis:
This case establishes a significant precedent by recognizing a fiduciary duty owed by PUD developers to homeowners, particularly during the crucial phase of establishing the homeowners' association and transferring common property. This duty requires developers to ensure that common areas are conveyed in a non-substandard condition and that the association has a viable plan or adequate initial funding for maintenance. The ruling provides a crucial protection for early purchasers in PUDs, holding developers accountable for the initial viability of common infrastructure and the homeowners' association, and distinguishes between a developer's pre-conveyance duties and a homeowners association's subsequent operational decisions, to which the business judgment rule may apply.
