IN THE CHANCERY COURT OF SHELBY COUNTY TENNESSEE THIRTIETH JUDICIAL DISTRICT AT MEMPHI PART. THOMAS KRAJENTA, W in his capacity as an incumbent member of the Board of Directors of W Riverwood Farms Association, Inc.. eral, He Petitioners, x No: CH-1§ 3 VS, y RIVERWOOD FARMS, ae ASSOCIATION, INC., A Tennessee nonprofit corporation 1 Respondent x VERIFIED PETITION TO APPOINT A RECEIVER TO ADMINISTER THE AFFAIRS OF RIVERWOOD FARMS ASSOCIATION, INC. Petitioners are a group of incumbent members of the Board of Directors, a former Board member and general members of Riverwood Farms Association, Inc., a Tennessee mutual benefit non-profit corporation, who allege that past and present actions and inactions by the Board of Directors of the Riverwood Farms Association, Inc. require the appointment of a receiver to manage the aflairs of the corporation, and would show the following: NATURE OF THE ACTION 1, This is an action brought by three (3) out of seven (7) incumbent members of the Board of Directors (the Board) of Riverwood Farms Association, Inc., a/k/a/ Riverwood FarmsHome Owners’ Association, (RFHOA) who are joined in this action by a former member of the Board, and by several general members of RFHOA who are interested in promoting good governance and sound management and operation of RFHOA. 2. The Petitioners are identified and described more fully in the Parties section below. The Respondent is a mutual benefit non-profit corporation, 3. This action is brought as a result of a history of inadequate governance and management dysfunction, the persistent failure or refusal of the Board or members to comply with the laws of the State of Tennessee in a number of particulars, probable ultra vires acts of the Board in a number of instances, and general incompetence and indifference by some former and incumbent members of the Board. 4. This action has become necessary due to a significant split between two factions of the members of RFHOA, which is primarily caused by the Board’s repeated use of annual maintenance assessment funds for a private protective services company for the subdivision, at very significant expenditures for that purpose, (possibly as much as $1,600,000 over the years and usually about 35% or more of the annual operating expenses) when there is no express grant of authority to do so in any of the governing documents of RFHOA. 5. The RFHOA has annual income of approximately $500,000 from annual maintenance assessments of its members. It has assets in the range of $6,000,000 to $8,000,000, which are comprised of approximately eighty-five (85) acres, including a Category 1 hazard dam (highest hazard rating possible given by the state), a thirty-five (35) acre lake, a creek the lake drains into, two retention ponds, a .3 mile drainage culvert, and other improvements, all of which warrant sound and professional governance and management of the RFHOA.6. The Board members are not paid for their services, and although the Board has purportedly had scheduled meetings once a month for many years, in actuality, for the last four or five years, it has averaged far fewer meetings than twelve per year, usually due to its inability to have a consistent quorum. This trend is continuing into 2018. 7. Relief is requested by the appointment of a receiver pursuant to the general receiver statute, Tenn, Code Ann, § 29-1-103. Further relief is requested under the ultra vires section of the Tennessee Nonprofit Corporation Act, Tenn. Code Ann. § 48-53-103, which also allows for a receiver in ultra vires situations. Declaratory relief is also requested under Tenn, Code Ann. 48-53-101, et. seg. 8. This is the first application for a receivership. 9. This is a legitimate case or controversy. There is nothing theoretical about it. It is ripe for adjudication, JURISDICTION, VENUE AND SERVICE OF PROCESS 10. This court has subject matter jurisdiction pursuant to Tenn. Code Ann. §§ 29-1- 101. ef seg., §§ 2 14-101, et, seg., and §§ 48-53-101, er. seg. 11. Riverwood Farms (the Development) is a single family dwelling, residential subdivision primarily located within the City of Memphis, with a small parcel in unincorporated Shelby County. The Development is located in the Cordova area of Shelby County. Tennessee, in the U.S. Postal District of 38016. 12, ‘Thus, venue is proper in the Chancery Court of Shelby County. 13, The Defendant may be served by serving its registered agent for service, Joyce Spiecha, at Keith . Collins Company LLC, 3036 Centre Oak Way, Germantown, TN 38138.THE PARTIES 14, The Petitioners are three different groups of people: (1) incumbent Board members who bring this action as a derivative action under Tenn, Code Ann. § 48-56-401, (2) a former Board member, and (3) two (2) interested members who bring this action under the Declaration of Covenants, Conditions and Declarations (DCCRs) of the development, Exhibit “A”, which permits any member to sue RFHOA to enforce the DCCRs. 15, The names of the incumbent Board members who bring this action are Thomas Krajenta, Johnny Pulliam and Michael Pickens. 16, The name of the former Board member is David Mills. 17, The names of the interested members are Terry Coggins, and Kim Wagner. 18, Interested parties are the incumbent Board members Volker Paul Westphal, Karen Taylor, Michael Poindexter and Janice Tankson, LEGAL GROUNDS JUSTIFYING THE APPOINTMENT OF A RECEIVER 19. Tenn, Code Ann. § 29-1-101 states: “The courts are all vested with power to appoint receivers for the safekeeping, collection, management, and disposition of property in litigation in such court, whenever necessary to the ends of substantial justice, in like manner as receivers are appointed by courts of chancery.” 20. In the instant case, due to the historical ineffective governance and mismanagement of the RFHOA and the continued dissension among Board members and members of the RFHOA, court supervision of the estate of the RFHOA is a necessity and thus the appointment of a receiver is the only effective means by which to conserve funds, spend funds of the RFHOA appropriately and legally, and for overall governance, management and operation of the RFHOA.21. Tenn. Code Ann. § 48-53-104 states: “A corporation's power to act may be challenged in a proceeding against an incumbent or former director, officer, employee or agent of the corporation, The proceeding may be brought by a director, the attorney general and reporter, or the corporation, directly, derivatively, or through a receiver, a trustee or other legal representative.” 22, As will be shown with more particularity below. the Board for many years has contracted with a private protective services company, euphemistically called a courtesy patrol, to patrol the Development and to provide private protective services for property not owned by RFHOA. 23. There is no provision in the DCCRs which specifically states that the Board may use maintenance assessment funds to provide the entire Development with a security patrol, a courtesy patrol or private protective services for members’ private dwellings. 24. Such a contract, especially one which consumes a huge percentage of the annual operating expenses, if not authorized by the DCCRs, constitutes an ultra vires act, and may be challenged by a Director or a receiver. GENERAL ALLEGATIONS 23. Development of the Riverwood Farms subdivision (the Development) started in the 1980s with a small parcel of property then in unincorporated Shelby County. Additional parcels were added to the Development through about the mid 2000s when the last parcel was added. 26. fier full development, the Development now comprises approximately 450 10 500 acres.27. There are approximately 1,125 single family dwellings, with about 2.700 to 3,000 individuals, residing in the Development 28. Home prices in the Development range between $150,000 to almost $400,000. Approximately twenty (20) to twenty-five (25) vacant lots are still available for construction of homes. 29. Once homes are built on these few remaining lots there will be no physical increase in the size of the Development as it is surrounded by other subdivisions and public roadways. 30. Demographies reflect a diverse mix of ethnicities and races. 31. The residents include singles, young and middle age couples with children, couples with no children, and elderly working and retired individuals. 32, Although most of the dwellings are owner occupied, the number of investor owned, rental dwellings, has steadily increased and is now approximately between one hundred (100) to one hundred twenty-five (125) dwellings. 33. In addition, there are approximately eighty (80) to eighty-five (85) home-based businesses operating from dwellings within the Development as a result of technological, employment and workplace changes. 34. As aforementioned, the Development has a homeowners association, (RFHOA), which is run by a Board of Directors, seven (7) in number, which is elected by the property owners at an annual meeting. 38. Directors serve for one year terms without pay36. During construction and development of the subdivision the developer set aside several parcels, totaling approximately eighty-five (85) acres, known as the common area, for the exclusive benefit and use of the property owners, 37. The common area is owned by RFHOA and it is the responsibility of the RFHOA to operate it and maintain it, 38. Improvements made by the developer to the common area make the Development, extremely unique and attractive; but, due to the size and complexity of the common area, RFHOA faces very unique challenges for a home owners association in terms of the complexity and costs of: risk assessment, management and mitigation; ongoing maintenance, periodic repairs and replacement of capital assets as these assets age; and providing improvements to the Development when deemed appropriate and necessary. Charter, By-laws, Declaration of Coven: 39. RFHOA is a nonprofit mutual benefit corporation chartered in 1986 (Instruments Y6-4524, Y4-7215 and subsequent amendments) (the Governing Documents) operating pursuant to the Tennessee Nonprofit Corporation Act (TCA §§ 48-51-101 et.seq) (the Act) as a homeowners association. 40. RFHOA is governed in accordance with the Governing Documents which were made and recorded over a number of years. 41. Two classes of RFHOA members existed pursuant to the DCCR’s during the development and construction phase of the subdivision. 42. Class A Members are owners who hold a fee simple title to any lot within the Development excluding those who hold title merely as performance of an obligation. 43. Class A Members are entitled to one (1) vote for each lot owned 744. Class A Members also own an equal proportionate share of the assets of the Association. 45. Class B Members were the developer who was entitled to ten (10) votes for each lot owned. 46. The developer had absolute control over governance, po 's, fiscal management and management and operation of RFHOA until ninety percent (90%) of the lots were sold. 47. A Board of Directors, controlled by the developer, established an annual maintenance assessment which was paid by Class A Members but not by Class B Members, the developer. 48. The annual maintenance assessment was maintained below $200 per lot through the time RFHOA was controlled by the developer, but was subsequently increased. 49. For 2017 the annual maintenance assessment was $400 per lot but, between 2013 through 2016 it was $500 per lot. The Dam, The Lake, The Creek, The Ponds and Drainage Canal And Statutes Applicable Thereto 50. These improvements include a man-made thirty-five (35) acre lake (constructed in 1986), initially thirty-five (35) feet in depth, created by a man-made earthen dam approximately thirty (30) to forty (40) feet tall with a paved roadway across the dam of about .2 mile in length.. ‘Surface and rain water from the city streets and grounds collects in street drains which drain via storm culverts into the lake. 51. The dam is subject to all laws and regulations pertaining to the Tennessee Safe Dams Act, Tenn, Code Ann. §§ 69-11-101, et.seq. 52. The earthen dam has a regular spillway, an emergency spillway, and a drawdown drain.53, The earthen dam is inspected annually by the state inspector, due to the fact that it is classified by the state, pursuant to the Safe Dam Act regulations, as a Category 1 hazard, the highest hazard rating of dams. 34, The Tennessee Department of Environment and Conservation makes and enforces the rules and regulations of the Tennessee Safe Dam Act. Its Rules and Regulations define a Category 1 dam thusly: “Category I dams are located where failure would probably result in any of the following: loss of human life, excessive economic loss of downstream properties; excessive economic loss, public hazard, or public inconvenience due to loss of impoundment and/or damage to roads or any public or private utilities.” Safe Dam Act Rules and Regulations, Rule 0400-45-07-05. 35. The earthen dam was last inspected in May of 2017; it passed the inspection, and its state certificate of operation is in full force and effect. 36. However, the annual inspections are visual only and thus limited to what the inspector can actually see. 37. Obviously one side of the dam is covered with water ~ except for the top five (5) to ten (10) feet. 58. It is somewhat disconcerting that the inspector does not check for the integrity of the inside structure, which would seem to be prudent given its Category 1 status, 39. Toa trained inspector, there will be visual signs of some loss of internal inte; in most cases, but obviously not in every single one.60. Although the dam has passed a visual inspection each year, there has been no structural integrity study by a qualified and certified engineer since the dam was constructed in 1986. 61. The applicable law that would pertain to a dam breech is well stated in Zollinger vy, Carter, 837 S.W.2d 613,615 (Tenn. App. 1992), thusly, “The law regarding a change in natural drainage is well-settled in this jurisdiction. If the owner of higher lands alters the natural condition of his property so that surface waters collect and pour in concentrated form or in unnatural quantities upon lower lands, he will be responsible for all damages caused thereby to the possessor of the lower lands.” 62. It seems clear the RFHOA would be strictly liable for all damages resulting from adam breech. 63. Only a very few developments face the potential liability of a Category 1 dam breech. 64. Recently, Riverwood Elementary School was built not far from the dam, and one access street to the school is directly in the floodway of the dam and which is often backed up with cars during school days especially around 8:00 AM and 3:00 PM. 65. Of course many homes are also in the floodway of the dam. So extreme care is, justified in ensuring the dam remains safe. 66. Proper maintenanes critical to ensure safety. 67. Periodic upgrades of the dam, to meet new dam safety requirements are absolutely justified, even if not required by the pertinent dam regulations, because of the strict liability that would be imposed on the RFHOA.68. The scope of potential damages and, therefore, the liability risks for the RFHOA. caused by a dam breech are not known because there has not been an engineering study or risk assessment of such a catastrophic event. 69. More disturbingly, what is known is that the RFHOA general liability insurance and umbrella insurance policies exclude coverage of the lake and the dam. 70. Petitioners seem certain that no such lake or dam coverage exists in a separate policy. putting RFHOA and its members at significant liability risk and leaving the general public at risk as well of having no insurance to pursue. 71. Failure to seek a thorough and adequate inspection, establish the potential liability risk, and secure lake and dam insurance is a risk management failure of the highest order. 72. Below the dam are two retention ponds of about an acre each which catch water not caught by the dam. 73. Water from the lake and other sources is directed via a creek and a network of ditches. 74, ‘The water from the lake, the creek, ditches, ponds empty into a large drainage canal that is 3 mile in length, partially lined with concrete, 75, These assets serve a crucial function of preventing surface water flooding throughout the Development and in other surrounding areas. 76. The lake, ponds, and canal all drain into what is known as the Fletcher Creek Drainage basin, which is so well known to be flood prone that the City of Memphis and Shelby County have a set of regulations just for it, and no other basin in Shelby County does. 77. Essentially the flood control project in the Development is a combination of city streets collecting the surface water, which flows through city conduits, into a private lake andponds via private ditches into a private canal and back into the city or county Fletcher Creek drainage system. 78. All of RFHOA’s private collection, retention and discharge of surface water is also subject to the laws and regulations pertaining to the Water Quality Control Act, Tenn. Code Ann. §§ 69-3-101 and 69-5-716 regarding control of water into a main drain, ditch or watercourse to prevent silt or sand from reaching the main ditch, drain or watercourse. 79. In addition to the safety issues of the dam, there have been and is still another significant issue of the lake regarding silt and sand. 80. The Development is now old enough that vegetation prevents most of the erosion and silting that was a problem when homes were being built. (The lake needed some silt and sand removal years ago during the construction phase of the Development). 81. Nevertheless, there is some erosion that continues to cause silting in the lake. 82. Often after heavy rains the lake is turbid, indicating that silt and sediment are coming from somewhere. 83. Moreover, the frequent rise and fall of the lake level (called bounce) has eroded and continues to erode the shoreline. 84. This erosion causes trees around the shoreline to continually fall into the lake, at the rate of several per year, and in some places the shoreline may have cut back fifteen (15) feet or more from when the lake was built, 85, The lake surface is continuing to get larger, but overall the lake is likely more shallow than it was originally. as it continues to collect silt.86. At some point in time, the lake may need dredging and any removal of silt will be subject to laws and regulations regarding silt capture, 87. The lake was built with a drain/drawdown and a report to the 2013 Board disclosed that the drain/drawdown might not operate and that repairs to fix it could require a huge expense. 88. Without a properly working drain/drawdown, the only way to drain the lake is by pumping it 89. To determine whether it works or not requires taking the chance that if it is opened and cannot be shut, the lake is drained unintentionally or unexpectedly. 90. An operating drain/drawdown, according to experts is highly recommended to have an emergency drawdown to prevent breech, and of course would help with procuring dam insurance as it would limit risk. The drawdown/drain needs to be operable, 91. Moreover, periodic draining of the lake from the bottom, might legally remove silt from the lake if the discharge was held in a sediment basin before being allowed into the main watercourse of the Fletcher Creek Drainage Basin. 92. Only minimal attempts have been made to reduce runoff and erosion, and the lake is silting up, which at some point will most likely require dredging of the lake as occurred in a nearby Rockereek/Countrywood area subdivision, which is also part of the Fletcher Creek Drainage basin. 93. The combination of having no drawdown/drain and limited erosion management makes dredging if the lake a future likelihood.94. Dredging the lake will be a major capital expense and require a large special assessment of the members unless the Board is proactive and begins to immediately fund sufficient reserves. 95. There have already been issues of sediment blocking the drainage canal, and a major project was required to remove the sediment and trees and other vegetation that had accumulated from sediment build-up in the canal. 96. Although sedimentation in the canal has been a known issue since 2012 the only attempt to mitigate its continued occurrence (at a cost of $250,000 or more) has proven to be minimally effective. 97. Unfortunately, the canal was not designed with a sediment basin for collection and easy removal of sediment. 98. The Board has chosen to delay dealing with this issue which will inevitably result in greater costs for the RFHOA. 99, Moreover, the creek below the dam is the outlet for the emergency spillway and for the drawdown/drain, 100. This creek is just inside the RFHOA property line and on the other side of the property line is the relatively new Riverwood Farms Elementary school. 101. In places, the creek is more than ten feet deep and during a major rain is very swift. 102. This creek was also responsible for most, if not all, of the sediment in the canal.103. After the schoo! was constructed no barrier was built around the creek to protect the school children and others from this hazard. 104, And, no attempts were made to stop the erosion of the creek (such as spillways) to prevent further sedimentation build up in the canal. 105. Inattention to this creek is a further serious public safety and risk management failure that has now existed for several years. 106. Then there are issues with the lake's wildlife which is stocked with fish and has a large permanent duck and geese population. Excess turtles are now a problem, and in the past beavers were a problem and required removal. 107. ‘The lake is well known for its fishing, which is permitted exclusively to members and their guests. 108. Tenn, Code Ann. § 70-2-102, et. seq. requires a license to fish, with very few exceptions none which are applicable to the RFHOA lake 109. There appears to be minimal enforcement of proof of fishing licenses and minimal enforcement of non-authorized fishing by non-members. 110. Unauthorized fishermen and probably non-licensed fishermen, as well, have at times negatively impacted the fishing on the lake. 111. The Board has also permitted boats to be stored on the shores and in the water of the lake.112, All of these issues pose liability risks for the RFHOA and are not being properly addressed or managed. 113, The trees in the common areas, of which there are many, seldom seem to get attention. 114. — Trees continue to fall in the lake. 115. Cypress trees, which are a water hardy species, were recommended to be planted around the lake to secure the shoreline and they were never planted despite the cost of planting such trees would have been easily affordable. 116, Low cost terracing and other low cost anti-runoff suggestions have also not been implemented. 117. In addition, other improvements to the common area include: two (2) to three (3) miles of paved walking paths around the lakes and ponds, a number of small wooden bridges over the walking paths, (6) to seven (7) miles of hardwood split rail fencing, nwo (2) gazeboes, eight (8) public entrances to the subdivision of which six (6) include brick walls and other structures delineating the subdivision’s boundaries, a .3 mile in length paved alleyway: an asphalt driveway on the top of the dam, a parking lot for vehicles and boat trailers, a boat ramp and a pier, and several other natural and manicured common areas all of which are owned by the RFHOA. 118. The walkway around the lake is in need of new asphalt, and a number of bridges need repair or replacement.119. In summary; risk assessment, management and mitigation of the RFHOA liabilities and project management especially for complex, long-term, and large projects have been awful and have produced less than satisfactory results. Lack Of Employees and a Clubhouse or Building For Meetings 120. RFHOA has no employees and, as a result, there is no consistent management due to high tumover of the Board. 121, Importantly, the Board of RFHOA has never hired anyone specifically dedicated: to the management and maintenance of the dam, the lake, the creek, the ponds, or the drainage culvert; to manage or maintain the natural areas surrounding them: and to manage and coordinate contractor activities though there have been suggestions that RFHOA hire someone specifically for these purposes. 122. One suggestion that could have provided security for the lake and other common areas and simultaneously could have helped with maintenance and administration of the common areas was the employment of park rangers, urban foresters, and/or game wardens or a similar professional. 123. Although that suggestion was recommended to the Board in 2013, it was not adopted, and has never received any support by any subsequent Board 124, Absent from the RFHOA owned property, which some homeowners associations of similar size do have, is any enclosed, secure and air conditioned and heated structure suitable for Board meetings, any facility suitable for storage of RFHOA records, or any facility suitable for employees to work should any be hired. 125. Over the years Board meetings have usually been held at a Board member's home, or at some other location.126. As aforementioned, the fact that Board members have to meet in a Board member's home, or at some other location, has also proved to be problematical. often resulting in Board members not attending when things get contentious or when the meetings are held some place not particularly convenient, such as at the Management Company. 127, There is adequate income (particularly if funds were used appropriately and within the provisions of the DCCRs) for hiring dedicated employee (s) and renting a facility (such as a home in the Development) that would be a convenient meeting place for the Board and for storing RFHOA records. 128. The RFHOA needs to seriously consider; hiring dedicated employee (s) and renting, acquiring or constructing an adequate on-site facility to conduct the business affairs of the RFHOA and store its records for easy inspection by its Board or members. 129, The fact that RFHOA has no meeting place is also an impediment to hiring employees which may be part of the reason RFHOA has always used independent contractors to perform whatever work the Board deemed necessary 130. For some time after the Developer conveyed the RFHOA to the members, the president of the Board was also the chief engineer for the Development, but he was voted out in 2013. 131, Since then, the Board has had minimal engineering guidance by anyone truly familiar with the engineering challenges regarding the dam, the creek, the ponds, and drainage canal. 132. To summarize, the RFHOA has no one with the overall necessary knowledge, skills and expertise who is specifically dedicated to properly manage the RFHOA, and it has no