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Case Summary for May 13, 2015
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DOCKET SUMMARIES
SUPREME COURT OF MISSOURI

9:30 a.m. Wednesday, May 13, 2015
____________________________________________________________________________________________________

SC94693
The Arbors at Sugar Creek Homeowners Associations Inc., et al. v. Jefferson Bank & Trust Company Inc. and McKelvey Homes LLC
St. Louis County
Dispute over association governing subdivision, interpretation of subdivision declarations
Listen to the oral argument: SC94693.mp3SC94693.mp3
The homeowners were represented during arguments by Mark B. Leadlove of Bryan Cave LLP in St. Louis, and the bank was represented by Richard A. Ahrens of Lewis Rice LLC in St. Louis.

Evolution Developments LLC borrowed money from Jefferson Bank & Trust Company Inc. to develop The Arbors at Sugar Creek subdivision in Des Peres. By the end of 2009, homeowners had purchased five of the subdivision’s 18 lots and built custom homes on them. In March 2010, Jefferson Bank foreclosed on and took title to the 13 unimproved lots. Two months later, the bank entered into a contract giving McKelvey Homes LLC the option to buy lots from the bank, build homes on them and sell them. Since then, McKelvey built and sold one home in the subdivision, on lot 13. Over time, a dispute arose between the original five homeowners and the bank over the declaration of covenants, conditions and restrictions governing the subdivision, which Evolution recorded with the county in May 2006. The parties disagree about what homeowners association has authority to govern the subdivision and apply the declaration’s architectural and design provisions; how those provisions should be interpreted; who is eligible to serve on the board of directors for the homeowners association; the validity of certain amendments made to the declaration; and whether the home McKelvey built and sold on lot 13 conforms to the declaration’s provisions. Evolution created an original homeowners association, which the secretary of state administratively dissolved for failing to file an annual report in December 2006. In April 2010, the five homeowners formed their own homeowners association in which they were the only members. This homeowners’ association appointed a design review committee and disapproved the homes described or depicted in McKelvey’s marketing materials.

The homeowners sued the bank and McKelvey in May 2010; the bank filed counterclaims against the homeowners. According to the bank, it obtained from Evolution an assignment of Evolution’s declarant’s rights. During a September 2010 meeting to which lot owners were invited, the bank – which owned 72 percent of the lots in the subdivision – voted to form a new homeowners association and to amend the declaration to identify the new association as the one governing the subdivision. The five sets of homeowners challenged the new association’s authority. In January 2011, the trial court entered a partial judgment determining that the new association created by the bank was the homeowners association authorized to govern the subdivision. Eventually, three members were elected to the association’s board: two bank officers elected by the bank (as owner of 13 lots) and one homeowner. In July 2011, McKelvey presented to the board its plans to build a home on lot 13 of the subdivision for its customers; the bank’s two board members approved the plans. In August 2011, the homeowners sought injunctive relief to prevent construction of the home, which they alleged does not conform to the architectural and landscaping requirements of the declarations. After an evidentiary hearing, the trial court denied their request. Ultimately – after hearing evidence presented over four days in the spring of 2012 – the trial court issued its decision that the bank’s executives were proper members of the board of the governing homeowners association and that the houses the bank and developer planned to build in the subdivision complied with the requirements of the subdivision’s recorded declaration of covenants and restrictions. In its final judgment, issued in January 2013, the court granted judgment to the bank on all the homeowners’ claims, requiring them to reimburse the bank for expenses it incurred in maintaining subdivision common areas. The court also granted judgment to the homeowners on the bank’s counterclaims for abuse of process and slander of title. The homeowners appeal; and the bank cross-appeals.

Homeowners’ appeal

The homeowners argue the trial court erred in determining the bank’s executives were serving properly as board members of the governing homeowners association. The homeowners contend the executives were not qualified to serve on the board because the declaration required board members to be residents of the subdivision, which the bank executives were not. The homeowners assert the bank’s attempt to amend the declaration to allow non-residents and owners “other than the declarant” to be directors is invalid under Missouri law. The homeowners argue the bank breached its duty of good faith and fair dealing by purporting to “amend” the declaration. They contend the purported “amendment” is null and void because it creates a new restriction on the homeowners, which they assert requires unanimous approval under Missouri law. The homeowners argue the bank could not appoint directors because the period of the declarant’s control had expired. The homeowners contend the trial court erred in granting partial summary judgment to the bank determining that the homeowners association had authority to govern the subdivision pursuant to the declaration. They assert the homeowners association did not have such authority under Missouri law because the association was not the one designated by the declaration nor an assignee of the association designated by the declaration. The homeowners argue that Missouri law requires an assignment for a successor homeowners association to govern a subdivision properly and that the association the bank created has no such authority to govern the subdivision. The homeowners contend the bank’s proffered “substitutes” for an assignment are insufficient to empower the association it created. The homeowners assert the trial court erred in denying them injunctive relief and in granting declaratory judgment to the bank. They argue the association the bank created and the bank’s executives serving on that association’s board did not act reasonably or in good faith in approving McKelvey’s plans – including the plans for a house on lot 13 – because, the homeowners contend, the executives’ purported due diligence was unreasonable and not undertaken in good faith. The homeowners assert the trial court used an improper standard of review that deferred to the decisions made by the bank’s executives serving as board members. The homeowners argue the house McKelvey had under construction and those it planned to build violated the declaration’s architectural requirements. They contend these houses were not uniform and harmonious with the homeowners’ existing homes. The homeowners assert the trial court erred in determining the bank was entitled to reimbursement for certain alleged maintenance costs. They argue the bank had no legal or factual basis on which to obtain such relief, never asserted a claim for such relief and presented no competent evidence establishing a right to such relief. They contend the bank further failed to comply with the declaration’s procedures. The homeowners assert the trial court erred in granting judgment to the bank on their claims for damages. The homeowners argue they were entitled to damages because, they contend, the bank breached the declaration and its duties to the homeowners.

Jefferson Bank responds that the trial court did not err in granting it judgment determining that the homeowners association the bank created had the authority to govern the subdivision. The bank argues that Evolution – as the original developer and declarant – had authority to assign its rights to the bank and that Evolution did so, making the bank the successor declarant under the declaration. The bank contends this assignment was legally sufficient for the bank to exercise the rights assigned to it under the declaration, including the right to form a homeowners association. The bank asserts that, alternatively under the declaration, two-thirds of the lot owners were able to vote to designate a substitute association for the defunct original association and that, in September 2013, 13 of the 18 lot owners voted to establish the successor homeowners association. The bank responds that the trial court correctly ruled that the directors of the new homeowners association were not required to be subdivision residents. The bank argues that the declaration amendment eliminating the residency requirement was adopted lawfully, that such a vote did not need to be unanimous and that, because the period of declarant control had not elapsed, the bank was authorized to appoint directors as the successor declarant without regard to the residency requirement. The bank contends it did not breach any implied covenant of good faith or fair dealing, did not use subterfuse or evasion, and did not violate the spirit of any transaction. The bank responds that the trial court did not err in determining that the board of the new association acted reasonably in approving the McKelvey plans for the home on lot 13. The bank asserts that the bank officers/association board members took action to understand properly the meaning of the applicable declaration provisions and sought professional opinions about whether the proposed home complied with those provisions or would diminish the value of existing homes. The bank argues the officers/board members informed themselves about how various styles and building materials would fit within the subdivision, acted to benefit the entire subdivision and did not breach any duty owed to the homeowners. The bank responds that the trial court did not err in finding that the board of the new homeowners association properly determined that the proposed home on lot 13 complied with the declaration. Once the court determined the board members acted reasonably, the bank contends, the court properly deferred to the board’s interpretation and application of the declaration’s requirements, which the bank asserts was correct. The bank responds that the trial court did not err in ordering the homeowners and other lot owners to reimburse the bank, on a pro rata basis, for maintenance costs the bank expended on behalf of lot owners during the pendency of this case. The bank argues the court had authority to make equitable orders to do equity. The bank also contends the homeowners did not object to evidence the bank presented in support of its motion on which the court relied in making its order. The bank further responds that the trial court did not err in granting it judgment on the homeowners’ claims for damages. The bank asserts the damages claims all assumed that the bank breached the declaration, which the bank did not.

Bank’s cross-appeal

Jefferson Bank argues the trial court erred in granting summary judgment (judgment on the court filings, without a trial) to the homeowners on the bank’s counterclaim for slander of title in connection with the lis pendens (written notice that a lawsuit has been filed concerning title to or ownership in real estate) the homeowners filed with the county recorder the day they sued the bank. The bank contends that, as a matter of law, state law did not authorize the filing of a lis pendens because the homeowners did not assert any claim based on any equitable right, claim or lien designed to affect real estate. The bank asserts there also were disputed issues of material fact about some of the elements of this counterclaim, including whether the homeowners maliciously published the unauthorized lis pendens and whether the filing of the lis pendens caused pecuniary loss or injury to the bank. The bank argues the trial court also erred in granting the homeowners summary judgment on the bank’s counterclaim for abuse of process. The bank contends there remained issues of material fact, including whether the homeowners improperly filed their lawsuit, whether the homeowners did so for an improper purpose and whether the bank was damaged as a result.

The homeowners respond that the trial court did not err in granting them summary judgment on the bank’s counterclaim for slander of title. They argue there were no genuine issues of material fact. They contend Missouri law permitted them to file the lis pendens, there was no evidence they published the notice of lis pendens maliciously and the bank admitted it had not been damaged by the lis pendens. As such, they assert, the bank should be foreclosed from using an affidavit from McKelvey’s president to attempt to prove the bank was damaged. The homeowners respond that the trial court did not err in granting them summary judgment on the bank’s counterclaim for abuse of process. They argue there were no genuine issues of material fact. They contend they did not file their lawsuit against the bank improperly and did not seek to use the suit for an improper purpose.

SC94693_homeowners_first_brief.pdfSC94693_homeowners_first_brief.pdf SC94693_Jefferson_Bank_and_Trust_Co_first_brief.pdfSC94693_Jefferson_Bank_and_Trust_Co_first_brief.pdf SC94693_homeowners_reply_brief.pdfSC94693_homeowners_reply_brief.pdfSC94693_Jefferson_Bank_reply_brief.pdfSC94693_Jefferson_Bank_reply_brief.pdf



SC94683
In re: Allison L. Bergman
Jackson County
Attorney discipline
Listen to the oral argument: SC94683.mp3SC94683.mp3
The chief disciplinary counsel was represented during arguments by special representative Kevin J. Odrowski, an attorney in Kansas City, and Bergman was represented by Edward D. Robertson Jr. of Bartimus, Frickleton, Robertson & Goza PC in Jefferson City.

Kansas City attorney Allison Bergman – who was employed by the law firm Lathrop & Gage – also served from June 2007 through January 2012 as outside general counsel and corporate secretary for Kansas City Terminal Railway Company, one of the largest railroad terminals in the country that had used Lathrop & Gage as its attorney since the company’s founding in 1906. The company’s board of directors is comprised of the company’s president along with members representing the company’s five shareholders – major railroads that also are competitors of the company. The parties dispute whether, in her role as general counsel, Bergman represented the company through its president (who has day-to-day responsibility for operating the company) or the company’s board of directors. Although Bergman said she never was asked to provide legal advice to the board, several board members said they relied on Bergman to provide independent advice to the board. In September 2007, the board instructed Bergman to prepare an employment agreement between the company and Charles Mader, who at the time owned a business called Interlocker LC that performed engineering consulting work for the railway company. Mader, who served as vice president and general manager of Kansas City Terminal Railway from October 2007 to June 2009, supervised Bergman’s legal work as well. From 2007 through 2011, all of Lathrop & Gage’s legal bills to the railway company were submitted under Bergman’s signature, and the company’s president had to approve payment of the bills along with the company’s chief financial officer. William Somervell was president of the railway company until he retired in June 2009 and was replaced by Mader. In January 2012, the railway company began an internal investigation of Mader’s outside business activities involving companies in which he had a personal interest.

The investigation revealed that, since 2002, Bergman and Mader had been in a close, personal relationship that, at times, had been romantic and sexual. Neither revealed the existence of their relationship to the railway board, nor did the board waive any conflict of interest the relationship potentially created or give informed consent to Bergman’s continuing legal representation of the company. Board minutes reflect Bergman was involved in the board’s decision to hire Mader as well as subsequent discussions regarding his performance and compensation. Company and board representatives said they did not know about the relationship between Bergman and Mader, although Bergman said Somervell knew about and encouraged the relationship. Bergman points to evidence that the company’s chief financial officer and one of the board members knew of her relationship with Mader in 2006 and 2009, respectively. Bergman said that she believed Somervell was the highest-ranking representative of her corporate client, that she did not view the board members as her client and, therefore, that no disclosure to board members was necessary. Bergman denied that her relationship with Mader constituted a conflict of interest or that she jeopardized the company’s interest as a result of her relationship.

The company’s investigation also revealed that Bergman had billed for and Mader had approved legal fees relating to Tallgrass Railcar LLC, an entity owned by Mader, Somervell and one of Kansas City Terminal Railway’s vendors. Bergman drafted and filed the paperwork to create Tallgrass. She said she believed at the time it was affiliated with Kansas City Terminal Railway, although she later explained the ownership percentages to the vendor’s attorney and drafted a corporate ethics policy to help all Kansas City Terminal Railway employees avoid conflicts of interest. Bergman then drafted paperwork for the purchase of a $185,000 railcar and facilitated the closing, which she said she did not attend. Bergman said Somervell asked her to draft the purchase agreement, and she believed the railway company was buying the railcar. She did not present the proposed sale to the board of directors, although she says it was not unusual for Somervell to negotiate purchases without her further assistance. Ultimately, Bergman says Somervell directed her to create a separate company – Tallgrass – to purchase the railcar, which she believed he had authority to do. Bergman also drafted a proposed agreement so Tallgrass could lease the railcar to Kansas City Terminal Railway, although the lease never was executed. Bergman billed the railway company for this legal work; the company never asked her for a refund, and she never sought one. She later explained the Tallgrass ownership arrangement to the vendor’s attorney.

In addition, the investigation revealed that Mader maintained two outside businesses he formed in 2007 before he became a railway company employee – Interlocker LC and Black Boot Properties LC. Through Interlocker, Mader performed independent consulting work in 2010 and 2011 for a city in Kansas. Bergman performed legal work for Black Boot, which owned apartment buildings near her residence, and Mader had given her authority to make wire transfers on Black Boot’s behalf. Bergman did not report Mader’s outside work to the railway company; certain representatives of the company believed, however, she had a duty as general counsel and corporate secretary to do so. She also did not report Somervell’s and Mader’s purchase of the railcar or any other of the Tallgrass transactions to the board. In addition, the ethics policy Bergman drafted for the company contained a nepotism provision prohibiting any Kansas City Terminal Railway employee from supervising the work of a significant other.

As a result of its investigation, the board in February 2012 terminated Mader’s employment and removed him as a director. At the same time, the board also terminated Bergman as its general counsel and removed her as corporate secretary, effectively ending the company’s relationship with Lathrop & Gage. A regional disciplinary hearing panel conducted a hearing in May 2014 and, in October 2014, determined that Bergman had violated five rules of professional responsibility. The chief disciplinary counsel now asks this Court to discipline Bergman’s law license.

The chief disciplinary counsel argues Bergman is subject to discipline. Counsel contends the preponderance of evidence establishes that Bergman is guilty of numerous instances of professional misconduct. Counsel asserts Bergman violated Rule 4-1.7(a)(2) by engaging in a long-term representation of a client despite a significant risk that her representation would be limited materially by her own personal interests. Counsel argues Bergman violated Rule 4-1.8(j) by engaging in an undisclosed sexual relationship with a client, Rule 4-8.4(c) by failing to disclose that relationship to the railway company’s board of directors over a four-and-a-half-year period, and Rules 4-1.7 and 4-1.4(b) by failing to disclose the relationship to the board of directors when it was considering various important decisions in the company’s best interests. Counsel contends that Bergman violated Rules 4-1.5(a) and 4-8.4(c) by billing and receiving payment for approximately $10,000 in fees for legal work performed for the personal benefit of Mader and Somervell as well as by engaging in dishonest and deceitful conduct in billing the railway company for legal work not authorized by nor beneficial to the company. Counsel asserts that Bergman violated Rule 4-1.13(b). Counsel argues Bergman knew that Mader was engaged in improper activities on behalf of Tallgrass, Black Boot and Interlocker; that Somervell was engaged in improper activities on behalf of Tallgrass; and that these activities violated their legal obligations to the railway company and were likely to result in substantial injury to the company. Counsel contends that, despite this knowledge, Bergman failed to proceed as reasonably necessary in the best interests of the railway company. The chief disciplinary counsel asserts that this Court should suspend Bergman’s law license with no leave to apply for reinstatement for at least two years. Counsel argues that suspension is the baseline discipline under the American Bar Association standards and prior Missouri cases, that aggravating factors in this case bolster the appropriateness of suspension, and that suspension is necessary to protect the public and to maintain the integrity of the legal profession.

Bergman responds that the substantive law governing corporations and their representation precludes a finding that she violated the rules of professional responsibility. She argues that, under Rule 4-1.13, when an attorney is a lawyer for a corporation, the client is the corporation itself, not its constituents – including its officers, directors, employees and shareholders. She contends that a corporation controls its own governance with its bylaws and that the railway company’s bylaws provide that the railway company’s day-to-day management was by its president, not its board of directors, which meets only quarterly. As such, she asserts, the law authorized her to presume that Somervell, as the railway company’s president, had authority to speak for the company and that his directives were the wishes of her client. Bergman responds that she did not violate Rule 4-1.8(j). She argues that her relationship predated the rule’s adoption (and any potential conflict under it) by at least five years; that she had disclosed the relationship to the company through Somervell, its then-president, at least two years before the rule took effect; and that the company’s chief financial officer and a board member also were aware of the relationship. She contends that, under corporate law, because the company’s president was aware of her relationship with Mader, Somervell’s knowledge was imputed to the entire corporation, including its board of directors. Bergman responds that she did not subordinate the railway company’s interests to Mader’s interests and, therefore, did not violate Rule 4-1.7(a)(2). Bergman asserts that the chief disciplinary counsel failed to show any conflict of interest relating to the contract between the railway company and Mader’s company, Interlocker, and that there was no conflict. Bergman argues that she represented the railway company throughout the transaction, that she never discussed the contract with Mader and that the contract terminated when Mader became the railway company’s employee. Bergman contends that there also was no conflict of interest relating to Mader’s employment contract with the railway company and that the hearing panel found no evidence of a conflict. She asserts that Somervell asked that the contract be drafted, that she delegated the drafting to another attorney at Lathrop & Gage, and that Somervell determined the final terms of the contract and completed its negotiation, as was his practice. Bergman argues there was no breach of Mader’s employment contract caused by his ownership of Black Boot because the law does not define owning investment property to be outside employment. As to Mader’s involvement with Interlocker, Bergman contends his activities before he became the railway company’s employee and after he became its president violated neither his employment contract nor the company’s eventual ethics policy. Bergman asserts there also was no conflict of interest relating to the Tallgrass purchase of the railcar. Bergman argues that she believed Tallgrass was an affiliate of the railway company and that the idea of creating Tallgrass was borne of her concern about the railway company’s potential liability for owning the railcar. She contends she created Tallgrass at Somervell’s direction and drafted the purchase agreement for the railcar. She asserts she did not attend the closing and did not know Tallgrass was not an affiliate of the railway company until she checked the file in response to an inquiry from the counsel of the vendor that was a part-owner. Bergman responds that she did not violate Rule 4-1.13(b). She argues there was no evidence that Mader or Somervell misused corporate assets with regard to Tallgrass, Black Boot, Interlocker or otherwise. Bergman responds that she did not violate Rule 4-1.5(a). As noted above, Bergman argues that she billed the railway company for work relating to Tallgrass because her work was at the direction of the company’s president and because she believed Tallgrass to be the railway company’s affiliate. She contends there is no evidence that shew knew before late October 2011 – more than three years after her law firm last billed the railway company for work relating to Tallgrass – that Tallgrass was not a railway company affiliate. She asserts that the cases interpreting Rule 4-1.5 focus on the amount of the fee charged for work done, not billing the wrong entity and that no one disputed her hourly rate was not a reasonable fee. Bergman responds that there is no evidence that she violated Rule 4-8.4(c). She argues that she lacked the intent to be deceitful, dishonest, fraudulent or involved in misrepresentation either with respect to the Tallgrass bills or disclosure of her relationship with Mader, and, she contends, the chief disciplinary counsel has not proven otherwise.

SC94683_Chief_Disciplinary_Counsel_brief.pdfSC94683_Chief_Disciplinary_Counsel_brief.pdfSC94683_Bergman_brief.pdfSC94683_Bergman_brief.pdf

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