R. Douglas Hughes v. New Life Development Corporation

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

January 20, 2011 Session

R. DOUGLAS HUGHES ET AL. v. NEW LIFE DEVELOPMENT

CORPORATION ET AL.

Appeal from the Chancery Court for Franklin County

No. 18,444; 18,956 Thomas W. Graham, Judge

No. M2010-00579-COA-R3-CV - Filed April 29, 2011

In this dispute concerning the use of real property located in a common interest community,

we have concluded that summary judgment based on the amendments to the restrictive

covenants was not appropriate. We also find that the new owner has the authority to act as

developer.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed in

Part, Affirmed in Part

A NDY D. B ENNETT, J., delivered the opinion of the Court, in which P ATRICIA J. C OTTRELL,

P.J., M.S., and R ICHARD H. D INKINS, J., joined.

Frederick L. Hitchcock and Willa Beth Kalaidjian, Chattanooga, Tennessee, for the

appellants, R. Douglas Hughes, M. Lynne Hughes, Louise Hubbs, and Guy Hubbs.

Joseph Addison Woodruff and Michael A. Gardner, Nashville, Tennessee, for the appellees,

New Life Development Corp., Robby McGee, Jeffrey M. Dunkle, B.J. Cline.

Douglas Sevier Hale, Franklin, Tennessee, for the appellees, New Life Development Corp.,

Robby McGee, Jeffrey M. Dunkle, B.J. Cline.

OPINION

F ACTUAL AND P ROCEDURAL B ACKGROUND1

The appellants, R. Douglas and M. Lynne Hughes and Louise and Guy Hubbs

(collectively “Homeowners”), own property and homes in a subdivision in an area commonly

known as Cooley’s Rift, which is located on Monteagle Mountain in Franklin County and

Grundy County. Appellee, New Life Development Corporation (“New Life”), purchased

approximately 1,400 undeveloped acres in Cooley’s Rift as well as eleven unimproved

subdivision lots in July 2005. At issue in this case is New Life’s ability to develop its

property.

The original developer of Cooley’s Rift was Raoul Land Development Company

(“RLD”), a Tennessee corporation. In 2002, RLD recorded a subdivision plat for “Cooley’s

Ridge Phase I” (“the subdivision”) designating approximately 26 sites. RLD also recorded,

in both Franklin and Grundy counties, a document entitled “Declaration of Covenants and

Restrictions for Cooley’s Rift Preserve” (hereinafter referred to as “the Declaration” or “the

Restrictive Covenants”). Included with the Restrictive Covenants were bylaws for Cooley’s

Rift Homeowners’ Association, Inc. Homeowners purchased their properties from RLD.

Pursuant to a special warranty deed recorded on September 6, 2005, New Life bought

the property at issue from RLD. The purchase included eleven unimproved tracts in the

subdivision as well as some 1,400 acres of undeveloped land. The deed provides that the

transfer is subject to numerous easements and conditions, including the Restrictive

Covenants.

On April 16, 2007, Homeowners2 filed suit (“Case 1”) against New Life alleging that

RLD “created a comprehensive general plan for development of Cooley’s Rift” prior to

Homeowners’ purchase of their tracts and that this plan was described in various RLD

documents, including the Cooley’s Rift descriptive booklet and design guidelines.

Homeowners asserted that, “The Cooley’s Rift Plan promised extensive common properties

and amenities (the “Amenities and Preserves”) for the benefit of the Plaintiffs and other

owners of home lots in Cooley’s Ridge. . . .” In purchasing their lots, Homeowners asserted,

they reasonably relied upon RLD’s representations that Cooley’s Rift would be developed

1

Our factual summary draws in part from the facts set forth in our opinion in the previous appeal in

this case. See Hughes v. New Life Dev. Corp., No. M2008-00290-COA-R3-CV, 2009 WL 400635, at *1

(Tenn. Ct. App. Feb. 17, 2009).

2

The original plaintiffs included four other homeowners (two couples) in addition to the appellants. These two

couples obtained voluntary dismissals after an affiliate of New Life bought their homesites.

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in accordance with the plan. Homeowners further alleged that New Life knew of this plan

when it bought property in Cooley’s Rift and took title subject to the plan. According to the

complaint, New Life had announced its “intent to develop its property in Cooley’s Rift in

ways that violate the Cooley’s Rift Plan and the Restrictive Covenants.”

The complaint sets out seven counts: (1) an action for enforcement of three express

restrictions of the Restrictive Covenants, (2) a derivative action on behalf of the Homeowners

Association to enforce the express covenants, (3) a derivative action for an injunction qui

timet “to prevent New Life from altering or destroying any of the Amenities and Preserves,”

(4) a derivative action for specific enforcement of “the transfer of title to the Amenities and

Preserves to the Homeowners Association, as required by the Restrictive Covenants,” (5) an

alternative derivative action for a constructive trust to protect the Homeowners Association’s

rights in the Amenities and Preserves, (6) action for enforcement of Cooley’s Rift

development plan created by RLD and “enforceable by the Plaintiffs as implied covenants

that are binding upon New Life as the successor to the Raoul Company with the knowledge

of the Cooley’s Rift Plan,” and (7) a direct action to impose a constructive trust.

On November 27, 2007, the trial court granted New Life’s motion for judgment on

the pleadings. In its order, the court found that “the Declaration of Covenants And

Restrictions For Cooley’s Rift Preserve confines these covenants and restrictions to those

lands that fall within the boundaries of the lots and roads as shown on the recorded plat

entitled ‘Cooley’s Rift Subdivision, Phase I.’” The court further concluded that, pursuant to

the terms of the Restrictive Covenants, there were no implied covenants applicable to New

Life’s unsubdivided property. As to the Homeowners’ constructive trust arguments, the court

concluded that, in light of the disclaimer in the brochure and the language of the recorded

Restrictive Covenants, the Homeowners were not entitled to equitable relief in the form of

a constructive trust. Having rejected the bases for relief underlying all of the Homeowners’

claims, the court granted judgment on the pleadings in favor of New Life.

In the first appeal in this matter, this court concluded that the trial court erred in

granting judgment on the pleadings with respect to the following claims: claims premised

upon New Life’s proposed actions as to enumerated subdivision lots and claims based upon

implied restrictive covenants arising from the recorded subdivision plats or from a general

development plan. Hughes v. New Life Dev. Corp., No. M2008-00290-COA-R3-CV, 2009

WL 400635, at *9 (Tenn. Ct. App. Feb. 17, 2009).

On June 28, 2009, at a special meeting called by persons designated by New Life as

the board of directors of the Homeowners Association (“HOA”), 19 of the 22 HOA member

votes were cast in favor of amending certain provisions of the HOA charter and the

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Restrictive Covenants.3 The stated purpose of the amendments was to resolve issues about

which the case had been remanded by this court. Six HOA members (including

Homeowners) cast their three votes against the proposed amendments.4

The Homeowners filed a second lawsuit (“Case 2”) on August 11, 2009, against

appellees Robby McKee, Jeffrey M. Dunkle, and B.J. Cline, persons appointed by New Life

to act as members of the HOA board of directors. All three defendants were identified as

officers and employees of New Life International, the non-profit corporation on whose behalf

New Life Development, Inc. (“New Life”) had purchased the property at Cooley’s Rift. The

Homeowners claimed that the defendants were not lawfully elected as HOA directors and

officers and had acted unlawfully in amending the charter and restrictive covenants and in

undertaking other actions. The Homeowners complaint in Case 2 includes a request for an

injunction prohibiting the defendants from taking any action to enforce the charter and

restrictive covenant amendments, a derivative action to enforce the restrictive covenants, and

a derivative action for an injunction quia timet. Case 1 and Case 2 were consolidated by the

trial court.

Homeowners filed a motion for summary judgment as to Case 2, and the defendants

filed a motion for summary judgment as to Case 1. The trial court entered a memorandum

opinion and order on January 5, 2010. Both sides filed motions to alter or amend, and the

court entered a final order on January 29, 2010, in which it included revisions to its original

order. In its memorandum, the court addressed five issues raised by the parties:

1. Whether New Life obtained the right to act as the developer of Cooley’s Rift. The

court concluded that its deed gave New Life all of Raoul’s rights and interests,

including the right to act as the developer.

2. Whether the amendments to the charter and Restrictive Covenants passed by the

HOA on June 28, 2009 resolved the ambiguities regarding express restrictions and

possible implied restrictions arising from a general plan of development. The trial

court held that these questions were resolved in the defendants’ favor.

3. Whether New Life’s charter gave it the authority to develop its property. The trial

court agreed with the plaintiffs’ concerns on this issue, stating that the “[g]eneration

3

This meeting occurred during the pendency of a Tenn. R. App. P. 11 application filed by the

defendants in Case 1. The Supreme Court denied this application on June 30, 2009.

4

Under the bylaws, members are entitled to only one vote per homesite, and no more than one vote

may be cast for each homesite (except for those owned by the developer).

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of active business income of the type apparently inherent in at least portions of the

development plan announced by New Life Development, Inc. appear to be prohibited

by Section 501(c)(2) and Article VIII, Section (e), of New Life’s charter.”

4. Whether the recorded plan contains information sufficient to impose an implied

restrictive covenant to establish forest preserves. The court examined the plats and

found that the words “east preserve” and “west preserve” were not legible. The court

concluded that “[t]here is simply nothing on the instrument as recorded in the two (2)

Register’s offices [in both Franklin County and Grundy County] which can be used

to define and locate or even suspect the location of a restricted area.”

5. Whether the plaintiffs have standing to bring derivative claims. The court

concluded that the plaintiffs’ two votes represented less than five percent of the voting

power required by Tenn. Code Ann. § 48-56-401.

Based upon these rulings, the trial court granted summary judgment in favor of New

Life on all seven counts of Case 1 and resolved all three counts of Case 2 in favor of the

defendants. The court went on, however, to enjoin New Life from “engaging in any

development which would be a prohibited activity under Article VIII, Section (e) of its

Charter.” Homeowners have again appealed.

The issues presented by the plaintiffs on appeal are (1) whether the trial court erred

in granting New Life summary judgment in Case 1; (2) whether the trial court erred in

denying the plaintiffs summary judgment in Case 2; and (3) whether the trial court erred in

granting the individual defendants summary judgment in Case 2. New Life presents the

additional issue of whether the trial court erred in granting the plaintiffs an injunction against

New Life performing real estate development activity.

S TANDARD OF R EVIEW

Summary judgment is appropriate when there is no genuine issue of material fact and

the moving party is entitled to a judgment as a matter of law. Tenn. R. Civ. P. 56.04.

Summary judgments do not enjoy a presumption of correctness on appeal. BellSouth Adver.

& Publ’g Co. v. Johnson, 100 S.W.3d 202, 205 (Tenn. 2003). We consider the evidence in

the light most favorable to the non-moving party and resolve all inferences in that party’s

favor. Godfrey v. Ruiz, 90 S.W.3d 692, 695 (Tenn. 2002). When reviewing the evidence,

we must determine whether factual disputes exist. Byrd v. Hall, 847 S.W.2d 208, 211 (Tenn.

1993). If a factual dispute exists, we must determine whether the fact is material to the claim

or defense upon which the summary judgment is predicated and whether the disputed fact

creates a genuine issue for trial. Id.; Rutherford v. Polar Tank Trailer, Inc., 978 S.W.2d 102,

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104 (Tenn. Ct. App. 1998). To shift the burden of production to the nonmoving party who

bears the burden of proof at trial, the moving party must negate an element of the opposing

party’s claim or “show that the nonmoving party cannot prove an essential element of the

claim at trial.” Hannan v. Alltel Publ’g Co., 270 S.W.3d 1, 8-9 (Tenn. 2008).

A NALYSIS

Authority of New Life to act as developer

A preliminary issue relevant to both cases is whether New Life obtained the right to

act as the developer when it bought RLD’s property in Cooley’s Rift. Homeowners argue

that only RLD was authorized to act as the developer. We disagree.

The purchase and sale agreement dated July 5, 2005, provides that New Life is

purchasing the Cooley’s Rift property “together with all easements, rights and privileges

appurtenant thereto, . . . the Work Product Documents hereinafter defined and the name

“Cooley’s Rift” and all derivations thereof.” An attachment to the agreement lists the Work

Product Documents, which include marketing literature, design guidelines, bylaws, site plan,

architectural designs for certain amenities (including a gate house, lodge, and manager’s

house), and information related to a dam project. The express inclusion of these

development-related materials is consistent with the conclusion that RLD and New Life

intended for New Life to take over the role of developer.

The key document with respect to the interests conveyed is, of course, the deed itself.

In interpreting a deed, our primary purpose is to determine the grantor’s intent. Cellco P’ship

v. Shelby County, 172 S.W.3d 574, 586 (Tenn. Ct. App. 2005). We begin with the language

of the deed and the circumstances surrounding its creation. Id. Under Tennessee law, “a

deed conveys all of a grantor’s estate or interest in property unless it clearly expresses an

intent to limit the estate or interest conveyed.” Id. at 587 (citing Tenn. Code Ann. § 66-5-

101). The trial court emphasized the deed’s broad habendum clause: “TO HAVE AND TO

HOLD said tract of land, with the appurtenances, estate, title and interest thereto belonging

to said Grantee, its successors and assigns, forever.” The deed provides that New Life

receives the property subject to the recorded Restrictive Covenants. The Restrictive

Covenants define “Developer” as RLD “and its successors and assigns.”

In arguing that New Life did not become the developer, Homeowners emphasize the

HOA charter’s provision that “[t]he rights, duties and functions of the Board of Directors

shall be solely exercised by Developer” until the developer decides to allow the HOA

members to elect a board of directors. So, argue the Homeowners, only RLD could call a

meeting of the HOA board of directors even after it sold its property in Cooley’s Rift to New

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Life. This court must, however, avoid a construction of the charter that would produce an

absurd result. See In re Estate of Soard, 173 S.W.3d 22, 28 (Tenn. Ct. App. 2005). Under

the HOA bylaws, membership automatically transfers to a new property owner upon the

conveyance of a homesite and “[m]embership shall be appurtenant to and may not be

separated from ownership of any Homesite.” The interpretation espoused by Homeowners

would lead to the anomalous result that the HOA directors would be unable to act without

RLD, which no longer owns any property in Cooley’s Rift and thus cannot be member of the

HOA.5 Such a situation would effectively prevent the HOA from functioning.

Based upon the deed and all of the related documents and circumstances, we conclude

that the only reasonable interpretation is that RLD transferred its position as developer to

New Life.6

Derivative claims

In Case 1 and Case 2, some of the plaintiffs’ claims are derivative claims brought on

behalf of the HOA. The trial court held that the plaintiffs lacked standing to bring these

claims, and we agree.

Pursuant to § 4.02 of the HOA bylaws, members are entitled to “one vote each for

each Homesite in which they hold [an] interest.” This section goes on to state that “in no

event shall more than one vote be cast with respect to any such Homesite.” Thus, as HOA

members, the plaintiffs are entitled to two votes by virtue of their ownership of lots 2 and 3

of the subdivision. Under § 4.02(b) of the HOA bylaws, the “Developer shall be entitled to

five (5) votes for each Homesite owned by the Developer.” New Life owns eleven (11) of

the 24 platted lots in Cooley’s Rift, which gives New Life 55 votes.

Tenn. Code Ann. § 48-56-401(a) governs the right to bring derivative claims:

A proceeding may be brought in the right of a domestic or foreign corporation

to procure a judgment in its favor by:

(1) Any member or members having five percent (5%) or more of the voting

power or by fifty (50) members, whichever is less; or

5

According to the defendants, RLD is no longer an active corporation.

6

We decline to consider the plaintiffs’ argument that New Life, by virtue of its status as a corporation

chartered under § 501(c)(2) of the Internal Revenue Code, cannot act as a developer. New Life’s tax exempt

status is a matter for determination by the Internal Revenue Service.

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(2) Any director.

With two (2) of a total of 68 votes, the plaintiffs have only 2.9% of the voting power, not

enough to bring a derivative action.

Summary judgment in Case 1

Amendments

In moving for summary judgment in Case 1, New Life relied in large part upon the

amendments to the HOA charter and to the Restrictive Covenants enacted on June 28, 2009.

Homeowners challenge the validity of these amendments.

A summary of the amendments is in order. Section 10 of the original charter stated

that the developer would exercise the duties and functions of the HOA board of directors

until the developer in its discretion called a special meeting for the election of a board of

directors from the association members. This section of the charter was amended to clarify

that the “rights, duties and functions of the Board of Directors shall be solely exercised by

New Life Development, Inc., as successor and assign of Raoul Land and Development

Company . . . .”

The amendments to the Restrictive Covenants are much more extensive and

substantive than the charter amendments:

• Article 1.06 defines “common properties” to be deeded or leased to the HOA and to

be devoted to “the common use and enjoyment of the Owners.” The amendment

changed the definition by deleting “wilderness preserve areas” from the list of items

included in common properties.

• Article 1.10 defines “developer” and was amended to specify that New Life was the

developer.

• Article 1.11 defines “dwelling.” The original restrictions defined dwelling as “any

building situated upon the Property designated and intended for use and occupancy

by a single family, including any single-family detached house located within the

Property.” The amendments added the following phrase to the definition: “or shall

mean any building situated upon the Property designated and intended for use and

occupancy other than a single family if such other use is specifically consented to by

Developer or the Board in writing.”

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• Article 1.14 defines “homesite.” The original restrictions stated that a homesite was

an unimproved parcel of land intended as a site for a dwelling as shown on the

recorded subdivision map. The amendments provide that a homesite is a parcel

“designated” as a site for a dwelling on the recorded map “or as otherwise permitted

by this Declaration.”

• Article 1.16 defines “master plan.” In the original restrictions, the master plan was

defined to refer to “the drawing which represents the conceptual land plan for the

future development of Cooley’s Rift Preserve prepared by DM Survey, Inc.” The

amendments state that the master plan shall refer to “the most recent conceptual land

plan for the future development of Cooley’s Rift Preserve prepared by or on behalf

of Developer, as adopted, amended or modified from time to time by Developer, in

its sole and absolute discretion.” (The next sentence of Article 1.16, which was not

changed by the amendments, provides that the master plan shall refer to the most

recent revisions thereof.)

• Article 2.01 defines “property.” This article was amended to eliminate references to

landscaping and maintenance of recreational facilities, conservation purposes, and

wilderness preserves with hiking and riding trails. In their original form, the

restrictions stated, “The Master Plan shall not bind the Developer, its successors and

assigns, to adhere to the Master Plan in the development of the land shown thereon

except as to the general location and approximate acreage of the Common Properties.”

The amendments specify that the developer is to be bound by the master plan only as

to common properties created pursuant to Section 1.06. Furthermore, the amendments

take out qualifying language in the last sentence of Article 2.01 (making the

developer’s powers subject to limitations stated previously in the paragraph). The

final sentence of Article 2.01 now states: “The Developer shall have full power to add

to, subtract from or make changes in the Master Plan, in its sole and absolute

discretion.”

• Article 3.02 generally limits homesites to residential use. The amendments add the

following qualification: “unless such other use is specifically consented to by

Developer or the Board in writing and approved, if required, by all applicable

governmental authorities.”

• Article 3.03 generally prohibits the use of homesites for multi-family residences,

business purposes, or for equipment inconsistent with ordinary residential uses. The

amendments add the following qualification: “[u]nless such other use is specifically

consented to by Developer or the Board in writing and approved, if required, by all

applicable governmental authorities.”

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• Article 3.06 generally limits homesites to one dwelling and prohibits the

resubdividing of homesites. The amendments again add qualifying language: “unless

such other use is specifically consented to by Developer or the Board in writing and

approved, if required, by all applicable governmental authorities.”

A review of these amendments to the Restrictive Covenants reveals that they give the

developer unfettered discretion to change the terms of the Restrictive Covenants, including

the permissible uses of the land within the subdivision itself.7 New Life argues that the

amendments also correct any ambiguities in the Restrictive Covenants, thereby eliminating

the plaintiffs’ theory of implied restrictive covenants based upon a general plan of

development.8

In determining the effect of these amendments, we consider the nature of the

development at issue here: a residential common interest community. In common interest

communities, “the property is burdened by servitudes requiring property owners to contribute

to maintenance of commonly held property or to pay dues or assessments to an owners

association that provides services or facilities to the community.” R ESTATEMENT (T HIRD)

OF P ROP.: S ERVITUDES § 6 introductory note at 67 (2000). These types of developments

involve important public interests, including providing a mechanism for controlling the

community environment. Id. at 68. The law governing these types of communities continues

to develop. The R ESTATEMENT (THIRD) OF P ROPERTY: S ERVITUDES recognizes that this area

of the law “should facilitate the operation of common-interest communities at the same time

as it protects their long-term attractiveness by protecting the legitimate expectations of their

members.” Id. at 71.

The effect of common interest servitudes often depends upon the power of the

developer or the association to amend the servitudes. The latest R ESTATEMENT contains a

provision governing community members’ power to amend the declaration of servitudes.

Although a majority or two-thirds vote is sufficient for many amendments, the following

provisions protect the interests of the minority:

(2) Amendments that do not apply uniformly to similar lots or units and

amendments that would otherwise violate the community’s duties to its

7

In our previous opinion, we concluded that the Restrictive Covenants, by their terms, apply only to

the enumerated subdivision lots. Hughes, 2009 WL 400635, at *4.

8

In our previous opinion, we concluded that, due to ambiguities in the Restrictive Covenants, the trial

court erred in granting judgment on the pleadings with respect to the plaintiffs’ theory of implied restrictive

covenants based upon a general plan of development. Hughes, 2009 WL 400635, at *9.

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members under § 6.13 are not effective without the approval of members

whose interests would be adversely affected unless the declaration fairly

apprises purchasers that such amendments may be made. . . .

(3) Except as otherwise expressly authorized by the declaration, and

except as provided in (1), unanimous approval is required

(a) to prohibit or materially restrict the use or occupancy of, or behavior

within, individually owned lots or units, or

(b) to change the basis for allocating voting rights or assessments

among community members.

Id. at § 6.10. Section 6.13 provides that a common interest community association has

certain duties to its members, including treating members fairly and acting “reasonably in the

exercise of its discretionary powers including rulemaking.” Similarly, section 6.21 prohibits

a developer from exercising a power to amend or modify a declaration of servitudes “in a

way that would materially change the character of the development or the burdens on the

existing community members unless the declaration fairly apprises purchasers that the power

could be used for the kind of change proposed.”

A review of caselaw from other states reveals that “the majority of courts in other

jurisdictions that have considered the question have held that the power to amend a restrictive

covenant by a vote of less than 100% of the property owners in a subdivision is subject to a

‘reasonableness’ standard.” Miller v. Miller’s Landing, L.L.C., 29 So. 3d 228, 235 (Ala. Civ.

App. 2009); see also Armstrong v. Ledges Homeowners Ass’n, 633 S.E.2d 78, 87 n.2 (N.C.

2006); Mulligan v. Panther Valley Prop. Owners Ass’n, 766 A.2d 1186, 1191 (N.J. Super.

Ct. App. Div. 2001). The reasonableness standard has been described in various ways. In

Armstrong, the court held that “every amendment must be reasonable in light of the

contracting parties’ original intent.” Armstrong, 633 S.E.2d at 87. The court went on to state

that reasonableness could be ascertained “from the language of the original declaration of

covenants, deeds, and plats, together with other objective circumstances surrounding the

parties’ bargain, including the nature and character of the community.” Id. at 88. Another

court described the appropriate analysis to be “whether the rule is reasonable under the

surrounding circumstances.” Worthinglen Condo. Unit Owners’ Ass’n v. Brown, 566 N.E.2d

1275, 1277 (Ohio Ct. App. 1989). Courts may also seek to determine whether an amendment

is unreasonable, arbitrary, or capricious. Hutchens v. Bella Vista Vill. Prop. Owners’ Ass’n,

Inc., 110 S.W.3d 325, 330 (Ark. Ct. App. 2003); Buckingham v. Weston Vill. Homeowners

Ass’n, 571 N.W.2d 842, 844 (N.D. 1997); Worthinglen, 566 N.E.2d at 1277;

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Many courts go further to require that the amendments be consistent with the general

plan of development or that they not destroy the general plan of development. See Holiday

Pines Prop. Owners Ass’n, Inc. v. Wetherington, 596 So. 2d 84, 87 (Fla. Dist. Ct. App.

1992); Meresse v. Stelma, 999 P.2d 1267, 1273 (Wash. Ct. App. 2000); Shafer v. Bd. of

Trustees of Sandy Hook Yacht Club Estates, Inc., 883 P.2d 1387, 1392 (Wash. Ct. App.

1994); see also N. Country Villas Homeowners Ass’n v. Kokenge, 163 P.3d 1247, 1255 (Kan.

Ct. App. 2007) (finding a developer’s amendments unenforceable because the general power

to amend the declarations did not fairly apprise purchasers of possibility of drastic changes

that would “materially change the character of the development”).

While they have not been called upon to address the precise issue presented in this

case, we note that Tennessee courts have cited with approval the principal of construction

adopted in the R ESTATEMENT (THIRD) OF P ROPERTY: S ERVITUDES that servitudes should be

interpreted to give effect to the intention of the parties in light of the language used and the

surrounding circumstances, and to carry out the purpose for which the servitudes were

created. See Fanning v. Wallen, No. E2001-00228-COA-R3-CV, 2001 WL 950001, at *5

(Tenn. Ct. App. Aug. 21, 2001); Maples Homeowners Ass’n, Inc. v. T & R Nashville Ltd.

P’ship, 993 S.W.2d 36, 39 (Tenn. Ct. App. 1998) (also citing more traditional rule that courts

should adopt a construction of restrictions that promotes the free use of property);

R ESTATEMENT (T HIRD) OF P ROP.: S ERVITUDES at § 4.1.

We consider the case of Wilson v. Woodland Presbyterian School, No. W2001-00054-

COA-R3-CV, 2002 WL 1417064 (Tenn. Ct. App. June 25, 2002), to be the most factually

similar to the case before us. Wilson involved the application of protective covenants in a

residential subdivision limiting structures to one or two family dwellings and certain

outbuildings. Id. at *1. A school adjacent to the subdivision owned two lots within the

subdivision and began building a playground on one lot. Id. Homeowners filed a lawsuit

challenging the school’s actions, and the school obtained the approval of a majority of the

lot owners in the subdivision to an amendment to the restrictive covenants to remove the

restrictions from the school’s two lots. Id. Citing § 6.10 of the R ESTATEMENT (T HIRD) OF

P ROPERTY: S ERVITUDES, this court agreed with the trial court’s reasoning that “it would be

unfair and inequitable for the Court to allow owners who are not within immediate proximity

of the subject lots to make decisions that adversely impact on the adjacent homeowners and

not themselves.” Id. at *6. In reviewing caselaw from other jurisdictions, the court quoted

the following general statement: “For the most part, the trend appears to integrate these

[amendment] provisions narrowly in order to protect individual expectations of a uniform

scheme from alterations effectuated by less than a unanimous group of homeowners.” Id.

(quoting Patrick A. Randolph, Changing the Rules: Should Courts Limit the Power of

Common Interest Communities to Alter Unit Owners’ Privileges in the Face of Vested

Expectations? 38 S ANTA C LARA L. R EV. 1081, 1105 (1998)). Because the amendments did

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not apply uniformly to all lots and were not approved by all adversely affected property

owners, and the provisions regarding amendment of the protective covenants did not “apprise

purchasers that amendments to the covenants may apply in a non-uniform manner to lots

within the subdivision,” the court agreed with the trial court’s conclusion that the

amendments were invalid. Id. at *7.

In light of the principles applied in Wilson and the majority view adopted in other

jurisdictions, we must conclude that the amendments adopted by the HOA to change certain

definitions and give New Life unfettered discretion to change the restrictions applicable

within the subdivision did not entitle New Life to summary judgment.9 We reach the same

conclusion as to the attempted amendments to eliminate possible implied restrictive

covenants arising out of a general plan of development.10 At further proceedings on remand,

the trial court should consider whether the amendments, opposed by some HOA members,

are reasonable in light of the original intent of the contracting parties and the totality of the

surrounding circumstances, including whether the purchasers were apprised that such

amendments could be made and whether the amendments materially change the character of

the development.

Recorded plat

The other theory available to the plaintiffs to establish implied restrictive covenants

is implication by reference to a plat. See Hughes, 2009 WL 400635, at *9. The trial court

concluded, based upon its review of the record, that “there is nothing from which such an

implication can be made because it is undisputed that neither the words ‘east preserve’ or

‘west preserve’ nor any other inscriptions relative to same are legible thereon [on the

recorded plat].”

The 2002 recorded plat for Cooley’s Rift Phase I is specifically referenced in New

Life’s deed. The plaintiffs assert that New Life took its property subject to implied

restrictive covenants arising from the recorded plat, including the designation of an East

9

We find nothing objectionable in the charter amendment and declaration amendments designed to

clarify that New Life stepped into the role of developer.

10

We recognize that, in an appropriate case, judicial modification of a declaration might arguably

be justifiable in light of changed circumstances. See Miller, 29 So. 3d at 236-37. In this case, however, New

Life made no attempt to justify the amendments and cannot establish its entitlement to summary judgment

simply by referencing amendments adopted by fewer than all of the affected property owners.

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Preserve and a West Preserve with a combined area of 725.7 acres.11 New Life counters that

the alleged designations of forest preserves relied upon by the plaintiffs are not legible on the

recorded plat and therefore could not create implied restrictive covenants.

The core issue in this case with respect to this theory of implied restrictive covenants

is the issue of notice. New Life argues that it had no notice of restrictions on the

development of the Cooley’s Rift property from the recorded plat and therefore could not be

subject to any such restrictions. It is well-settled that “an owner of land is not bound by

covenants restricting the use of land by his remote grantor, when such covenants do not

appear in the owner’s chain of title and when he had no actual notice of the alleged covenant

at the time he acquired title.” Arthur v. Lake Tansi Vill., Inc., 590 S.W.2d 923, 930 (Tenn.

1979) (quoting Land Developers, Inc. v. Maxwell, 537 S.W.2d 904, 913 (Tenn. 1976)); see

also Massey v. R.W. Graf, Inc., 277 S.W.3d 902, 910 (Tenn. Ct. App. 2008).

The trial court found that the words “east preserve” and “west preserve” were not

legible on the recorded plat. We do not, however, consider this finding to be the end of the

matter. To be entitled to summary judgment, New Life had to shift the burden of production

to the plaintiffs by negating an element of their claim or showing that the plaintiffs could not

prove an essential element of their claim at trial. Hannan, 270 S.W.3d at 8-9. The blurriness

of the relevant words on the recorded plat does not conclusively establish the absence of

actual notice. The plaintiffs could establish that New Life had actual knowledge of the forest

preserves. Moreover, actual notice includes inquiry notice, or “knowledge of facts and

circumstances sufficiently pertinent in character to enable reasonably cautious and prudent

persons to investigate and ascertain as to the ultimate facts.” Texas Co. v. Aycock, 227

S.W.2d 41, 46 (Tenn. 1950); see also Blevins v. Johnson County, 746 S.W.2d 678, 683

(Tenn. 1988); Stracener v. Bailey, 737 S.W.2d 536, 539 (Tenn. Ct. App. 1986). Disputed

material facts remain as to whether, under the relevant circumstances, New Life should have

found out or actually did know what the blurry words on the plat said.

Therefore, except with respect to the derivative claims, we reverse the trial court’s

grant of summary judgment to New Life in Case 1.

11

The plaintiffs also point out that, in addition to these preserves, the 2002 plat shows Lake Louisa,

a network of roads, and a restriction of homesite development to single family dwellings. These issues were

not addressed by the trial court and, given our conclusion with respect to the forest preserves, we need not

address them here.

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Summary judgment in Case 2

Case 2 involves three claims: an individual action for injunction and two derivative

claims. Given our conclusion above concerning the plaintiffs’ lack of standing to bring

derivative claims, we must conclude that the trial court properly dismissed the two derivative

actions. The first claim asks for an injunction prohibiting the defendants “from taking any

action to enforce or apply any of the amendments to the Homeowners Association Charter

and Restrictive Covenants unlawfully adopted in the June 28, 2009 meeting.” In light of our

determinations regarding the legality of the attempted amendments to the restrictive

covenants, we must conclude that the trial court’s grant of summary judgment to the

defendants on this claim was erroneous. Because of the existence of material factual disputes

regarding the validity of the attempted amendments, we must also reject the plaintiffs’

argument that they were entitled to summary judgment on this claim.

Injunction against New Life

New Life raises an issue as to the propriety of the trial court’s injunction prohibiting

it from engaging in any activity prohibited by its charter–i.e., in violation of its status under

§ 501(c)(2) of the Internal Revenue Code.

In light of the foregoing holdings, we consider it unnecessary to address all of the

arguments on this issue. Portions of the trial court’s final order have been reversed by this

court, and the matter will be remanded for further proceedings. Tenn. R. Civ. P. 65.01

authorizes the issuance of a permanent injunction “in a final judgment.” Since we are

overturning the final judgment issued by the court below and remanding for further

proceedings, the injunction issued by the trial court should be vacated.

C ONCLUSION

For the reasons discussed above, the trial court’s judgment is affirmed in part and

reversed in part. Costs of appeal are assessed one-half against the appellants and one-half

against the appellees.

______________________________

ANDY D. BENNETT, JUDGE

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