Legal Update: Can Association Recover Attorneys’ Fees After Dismissing the Case?

Authors: Shani O. Zakay, Esq. and Jake Gallick

In a recent, unpublished opinion, the California Court of Appeal, 2nd District, allowed recovery of reasonable attorneys’ fees after the Association dismissed the case without prejudice. (Sungate Country Owners Association v. Stephens, 2014 WL 2203878).

Sungate County Owners Association is the Association for an RV community in Riverside County. In 2011 the defendant, Stephens, began living on his property without an approved recreational vehicle (RV) and was building a permanent structure in direct conflict with the Associations CC&R’s. The CC&R’s provide that lots are used exclusively for parking and residing in recreational vehicles and no permanent residential structures are allowed. Sungate filed a complaint with the court asking for injunctive relief to stop Stephens from building the structure and living on the land without an approved recreational vehicle.

The trial court granted the injunction and instructed Stephens to deconstruct the structure. Stephens then, without a court order, sold the lot to a third party and Sungate dismissed its action without prejudice. Sungate asked the court to award attorneys’ fees. Sungate reasoned that they are the prevailing party, for purposes of recovering fees, because they succeeded in having Stephens comply with the Association’s CC&R’s. The trial court awarded Sungate the attorneys’ fees and Stephens appealed.

The Court of Appeal found that substantial evidence exists to support the trial court’s findings that Sungate is the prevailing party and entitled to attorneys’ fees. Since Sungate’s action against Stephens was to enforce compliance with the governing documents, Sungate is the prevailing party. Determining the “prevailing party” is based on a practical level and if the moving party achieved its main litigation objective. Simply, a prevailing party is one that has motivated a defendant to modify his behavior through the lawsuit.

The court found that Sungate succeeded in preventing Stephens from continuing to reside on his lot without a proper recreational vehicle and building an unauthorized structure. Sungate’s dismissal of the case was proper and did not concede anything to prevent the Association from recovering reasonable attorneys’ fees.

This case teaches us that some courts will allow recovery to Associations when their legal action to compel compliance with the governing documents drives the violating owner out of the community permanently.

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Legal Update: Can Homeowners Bring Suit Against HOA Insurer for Breach of Professional Negligence?

In a recent, unpublished opinion, the California Court of Appeal denied individual homeowners’ claims against the insurer of the Las Brisas Homeowners Association for breach of professional negligence, fraud, and negligent misrepresentation. (Keilholtz v. Hertel, 2014 WL 5877968.)

Mr. Hertel was the insurance agent for the Association, who maintained an insurance policy through Truck Insurance Exchange. The policy, as required by the Association’s CC & R’s, provided “all risk” coverage against damages for both common areas as well as the individual units. After members of the Association’s Board made inquiries regarding reducing insurance costs, Mr. Hertel suggested that the Association change from an “all risk” policy to a “bare walls” policy. Under the latter option, the policy would cover all of the common areas of the development but not the individual units. Though there is some dispute relating to the circumstances under which the change was effectuated, it is undisputed that Mr. Hertel sent the change request form to an employee of the Association’s management company for signature. Subsequently, it was a member of the management company, not a member of the Association that effectuated the change in coverage. Within a few weeks of the policy change, one of the units in the development suffered water damage.

Shortly after the property damage occurred, the Association held a meeting during which members discussed the possible benefits and detriments to modifying the current CC & R requirement of an “all risk” policy. Mr. Hertel was present during this meeting, but failed to mention that the change between the “all risk” and “bare walls” policies had already been effectuated.

Following the property damage, the Association filed a claim with Truck for the water damage to the unit in the complex.  Truck ultimately denied the claim, citing the change in the claim coverage to common areas only. The owners of the unit subsequently filed suit against the Association, individual members of the Board, and the management company for failure to maintain “all risk” coverage, among other fraud and misrepresentation claims. As part of the eventual settlement of all claims, the Association agreed to pay the homeowners’ attorney fees.  The Association imposed a special assessment on the individual homeowners of the development in the amount of $8,500 per unit to fund the settlement.

Following the special assessment, the individual owners filed suit against Mr. Hertel for breach of professional negligence, fraud, and negligent misrepresentation to recover what they had to pay. The court determined Mr. Hertel was not liable to the individual homeowners.

While Mr. Hertel was not liable to the individual homeowners who paid the special assessment of $8,500, the settlement against the Association, individual members of the Board, and the property management company in favor of the owners of the damaged unit as a result of Mr. Hertel’s actions proved to be costly. As such, this case serves as a reminder for Associations to retain insurance agents who have experience with insuring Associations. While Mr. Hertel was acting on suggestions of individual board members, the intention to change the policy should have been communicated to the entire board, and the change was contrary to the policy coverage stated in the CC & R’s.

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Legal Update: Assembly Bill 1738 Passes Assembly Floor, May Have Impact on IDR Process

On May 20th, 2014, Assembly Bill 1738 unanimously passed through the Assembly Floor and will move to the Senate for consideration in coming months. Prior to AB 1738, Civil Code §5910 has governed the minimum requirements for Internal Dispute Resolution (IDR) between HOA’s and owners. Most notably, §5910(f) provides, “The procedure shall provide a means by which the member and the association may explain their positions.” While this section is silent regarding legal representation for the association or the owner during the IDR process, AB 1738 would provide a statutory requirement that an association’s IDR procedure include “a means by which the member and the association, or their counsel, may explain their positions.”

AB 1738 also proposes a change to Civil Code §5915, which provides, “The parties shall meet promptly at a mutually convenient time and place, explain their positions to each other, and confer in good faith in an effort to resolve the dispute.” AB 1738 would amend this provision to include the right of both parties to be represented by counsel when meeting and conferring.

While AB 1738 still requires Senate approval, it may have a direct impact on future IDR interactions between associations and owners. Upon initiation of the IDR process by either an owner or an association, the other party would have a statutory right to request counsel, causing increased expenses and delays in the quest for dispute resolution.

This bill serves as a warning to associations that IDR may not be as expeditious or financially advantageous as it previously may have been. The potential increase in costs associated with providing counsel at IDR meetings would need to be accounted for in an association’s budget, as would the likely increase in the amount of time allocated to the resolution of disputes.

Silldorf and Levine will continue to provide updates in future newsletters regarding AB 1738 and the possible future legal implications relating to IDR between associations and owners.

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Legal Update: HOA’s Breach of Fiduciary Duty Claim Against Developer Board Members Not Subject to Anti-SLAPP Statute

In a recent opinion, the California Court of Appeal denied a developer’s anti-SLAPP motion in a construction defect lawsuit that included claims for breach of fiduciary duty, fraud, and negligence. Talega Maintenance Corp. v. Standard Pacific Corp., 2014 WL 1440925.

The Association sued the developer after discovering that its hiking and riding trails were defectively constructed. Three of the developer’s former employees who served as its representatives on the Association’s board of directors were also named as defendants for statements made at board meetings regarding the trails. The Association alleged the developer board members committed fraud, negligence, and breached their fiduciary duties when they stated that the Association was responsible for costs to investigate and repair the trails.

The developer filed an anti-SLAPP motion to strike the Association’s claims. California Code of Civil Procedure section 425.16 (the anti-SLAPP statute) provides as follows:

“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”

Upon review of the trial court’s decision to deny the developer’s anti-SLAPP motion, the appellate court found that the fiduciary duty claim was primarily based on the developer board members’ withholding of information and expenditure of funds on the damaged trails, and therefore was not based on any written or oral statement as required by the statute. Due to the fact that the conduct of the developer board members was not protected under the anti-SLAPP statute, the motion was properly denied.

Additionally, the court stated that meetings of HOAs do not constitute official proceedings for purposes of the anti-SLAPP statute. Despite the fact that some courts have acknowledged HOAs to be quasi-governmental entities, this court held that HOAs do not perform or assist in duties of the actual government. Therefore, statements made at HOA meetings are not protected as acts of public participation under the anti-SLAPP statute.

This case is good news for HOAs as it demonstrates that associations may be able to pursue claims against developers when developer board members breach their fiduciary duties or make fraudulent or negligent statements at board meetings.

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Legal Update: Former HOA Employee Brings Suit Against HOA and Board Members for Defamation and Wrongful Termination

Four years after a former homeowners’ association employee filed suit against the association and several of its board members, a California Court of Appeal finally dismissed all causes of action. Foley v. One Harbor Drive Homeowners Ass’n, 2013 WL 1808267.

In 2009, Foley was going on her fifteenth year as the Association’s director of concierge services and special events. She alleged that a board member verbally attacked and slandered her at an annual membership meeting by telling the membership that Foley was overpaid and could not find a job elsewhere. These types of statements were purportedly later repeated to other board members and homeowners. Foley thereafter met with the general manager of the Association, where she claims that he told her that her job was safe. Subsequently, Foley hired an attorney to send a written complaint to the board asserting that board members and other homeowners had defamed her. Due to budgetary constraints, the Association eliminated Foley’s position and terminated her employment.

As a result, Foley sued the Association and other individuals for defamation and wrongful termination. The following is a summary of Foley’s various claims and how the court ruled on each of them:

Defamation Claims

Slander & Libel. Foley claimed that each of the individual defendants should be liable for slander or libel. Liability for defamation arises when a false statement of fact injures one’s character or reputation. In California, a common-interest privilege exists under Civil Code §47(c) which requires that the statement be made with malice in order to be considered defamatory. The court ultimately dismissed Foley’s defamation causes of action on the grounds that the allegedly defamatory statements were either protected as opinions or shielded by the Civil Code §47(c) privilege.

Wrongful Termination Claims

Violation of Public Policy. Foley argued the real reason for her termination was not a concern for the Association’s budget, but rather was a retaliatory act for her defamation complaint. A claim for wrongful termination in violation of public policy is valid when an employee is terminated for reporting “an alleged violation of a statute of public importance.” However, the court did not find Foley’s argument to be persuasive and found in favor of the Association on this claim.

Breach of Implied Employment Contract. Foley contended that the Association breached an implied employment contract with her by terminating her without good cause. In evaluating Foley’s claim, the court assumed that Foley’s testimony established such an implied contract. Nevertheless, the court determined that the Association terminated Foley for budgetary reasons and therefore had good cause to do so.

This unpublished opinion teaches associations and board members to be cautious when it comes to interactions or communications with association employees. Although this case was eventually dismissed, it took years to reach a final judgment on the matter. Since years spent in litigation can lead to numerous hours and dollars wasted for an association, this case is a helpful reminder that these situations can be prevented by careful conduct.

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Legal Update: Court Rejects Challenge to Rental Restriction in CC&Rs Amendment and Awards Attorneys’ Fees to Association

In an unpublished opinion, the California Court of Appeal for the Third District ruled in favor of an association when a member attempted to challenge a rental restriction policy adopted in an amendment to the CC&Rs.  Reynolds v. Auburn Country Villa Homeowners Association, 2013 WL 5838118.

The Association originally permitted owners to rent their condominiums, but after obtaining approval from a majority of the membership in 2003, the CC&Rs were amended to limit the number of rental units allowed.  The amendment also provided for exemptions from the restriction based on demonstrated hardship.  Reynolds, a trustee for the trust holding title to one of the Association’s condominiums, sought to enjoin the Association from enforcing the rental restriction amendment.

The trial court sustained the Association’s demurrer on the ground that the action was barred by the four-year statute of limitations set forth in Code of Civil Procedure §343; the amendment was recorded in 2003, and Reynolds’ complaint was not filed until 2009.  Furthermore, the court found the rental restriction to be reasonable and not in violation of public policy.

On appeal, Reynolds contended that the rental restriction was void ab initio.  However, she failed to state any facts or analysis to establish that argument.  The court reinforced the idea that “use restrictions contained in the CC&Rs of a common interest development are enforceable unless unreasonable.”  Additionally, Reynolds argued that the trial court erred in awarding attorneys’ fees to the Association.  In reviewing the order granting attorneys’ fees, the appellate court found that both Civil Code §1354(c) [now §5975(c)] and Civil Code §1717 entitled the prevailing party to recover its fees incurred during the lawsuit.  The Association was deemed the prevailing party because it was successful in its demurrer to Reynolds’ complaint, and therefore, was correctly awarded its attorneys’ fees under the Civil Code.

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Foreclosure: Judicial or Non-Judicial

Foreclosure

Debt collection is not a phrase many of us want to hear, but for Associations it is common place when homeowners fail to pay their assessments and fees. The delinquent assessments accrue and the Association is forced to take action to collect the debt. Pre-lien notices and lien notices are sent to the homeowner to prompt payment. When the homeowner continues to disregard the payment of assessments and the notices, the Association may turn to foreclosure of the property. There are two avenues of foreclosure available for Associations: Judicial and Non-Judicial.

Judicial foreclosure is done through the court system. After giving the appropriate notices to the homeowner and filing for a lien against the property, the Association may file a lawsuit with the court. The Association may seek both the ability to foreclose on the property and seek money damages, which can be obtained by means such as wage garnishment or bank levy. If, after obtaining a judgment, the Association decides to foreclose on the property, the foreclosure will be done by the county sheriff’s office. The proceeds of the sale will first pay court costs and the costs associated with the foreclosure. Then the Association and other creditors the homeowner may have will receive what they are owed.

The benefit of doing a judicial foreclosure is the ability to seek a deficiency judgment. There will be times when the proceeds of a foreclosure sale do not fully compensate the Association for the debt that it is owed. When that occurs, the Association can seek a deficiency judgment. A deficiency judgment is a judgment for the remainder of the debt owed to the Association. When considering whether to obtain a deficiency judgment, the Association should consider the homeowner’s right of redemption. The debtor homeowner is allowed to payback all the debt owed, and if he does so, he is given back his property. When an Association obtains a deficiency judgment, it extends the amount of time the homeowner can exercise his right to redeem the property.

Non-judicial foreclosures can be done by the Association without having to file a lawsuit. They are typically faster and inexpensive in comparison to judicial foreclosures, and there is no court oversight. Because there is no court oversight, it is highly important the Association follow the exact steps and guidelines prescribed by the California legislature to perfect the process. While the cost and speed of a non-judicial foreclosure are beneficial, the Association may not seek a deficiency judgment, nor may the Association seek payment of the debt by other means such as wage garnishment.

Both foreclosure options have their own pros and cons. As such, different debtors will call for different forms of foreclosure to adequately compensate the Association for the debt owed. An Association should, therefore, consider the pros and cons provided by both foreclosure processes, the economic background of the delinquent homeowner, and the Association’s own economic standing when considering which foreclosure process it is going to employ for the specific debtor and his property.

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The Revised Davis-Stirling Act

The year 2014 ushered in a new and improved Davis-Stirling Act. Following the installation of the revised Davis-Stirling Act, Associations have encountered and faced the task of making revisions to their governing documents to reflect the statutory changes.

While it seems as if only the Associations have dealt with and maybe still are dealing with such chores, the California Senate also faced the task of “clean[ing]-up,” as the Senate states in SB 745, the revised Davis-Stirling Act before it hit the main stream.

Two noteworthy acts of “clean-up” were the addition of section 4070 and the reorganization of section 4530. Section 4070, as currently seen in the California Civil Code, allows actions which need approval by a majority of a quorum to be done through a vote. Specifically, statute state states:

If a provision of this act requires that an action be approved by a majority of  a quorum of the members, the action shall be approved or ratified by an affirmative vote of a majority of the votes represented and voting in a duly held election in which a quorum is represented, which affirmative votes also constitute a majority of the required quorum. California Civil Code § 4070.

Additionally, section 4530 saw redlines and reorganization to the statutory provisions. For example, a comparison of subsection (b) of the initially submitted statuary provision, section 4530, and the final approved product looks like the following:

 (b) (1) The association may collect a reasonable fee based upon the association’s actual cost for the procurement, preparation, reproduction, and delivery of the documents requested pursuant to this section. Additional fees shall not be charged by the association for the electronic delivery of the documents requested.

(b) (2)  (1)  The association may collect a reasonable fee based upon the association’s actual cost for the procurement, preparation, reproduction, and delivery of the documents requested pursuant to this section.  Upon receipt of a written request request,  the association shall provide provide,  on the form described in Section 4528, a written or electronic estimate of the fees that will be assessed for providing the requested documents.

(2) (3)  No (A)   additional fees may be charged by the association for the electronic delivery of the documents requested. A cancellation fee for documents specified in subdivision (a) shall not be collected if either of the following applies:

(3) (i)  Fees for any documents required by this section shall be distinguished from other fees, fines, or assessments billed as part of the transfer or sales transaction. The request was canceled in writing by the same party that placed the order and work had not yet been performed on the order.

(ii) The request was canceled in writing and any work that had been performed on the order was compensated.

While the new Davis-Stirling Act went through its alterations and revisions, so too do the multitude of governing documents that exist for each and every Association in California.

For more information on the changes and revisions the Davis-Stirling Act went through, you can visit the California Legislative Information website at http://leginfo.legislature.ca.gov/faces/billVersionsCompareClient.xhtml.

 

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Legal Update: Adding Debtors to a Judgment

Judge Holding Mallet

A common problem for Associations is delinquent assessments. There are homeowners who for varying reasons fail to pay their monthly assessments. The Association is forced to turn to legal counsel to seek enforcement after its efforts to collect the debt fail. This generally results in a judgment against the homeowner, which the Association may seek to enforce. What if the homeowner, however, is an entity, such as an LLC, rather than an individual or individuals? And, what if that LLC is insolvent?

Recently, in Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, a California court of appeal had to address a similar situation. Airborne Turbine Ltd. (“Airborne”) failed to pay Relentless Air Racing (“Relentless”) for an airplane Relentless had sold to Airborne. Relentless sued Airborne and obtained a judgment for the funds owed. Relentless, however, was unable to collect the funds because Airborne was insolvent. Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, 222 Cal.App.4th 811, 813 (2013).

 Relentless, in order to collect the funds owed to it, sought to add additional parties to the judgment it had already obtained, including Linda and Wayne Fulton. The Fultons were the sole owners and operators of Airborne. The question the court had to ask itself was whether it would allow the Fultons to be added to the already existing judgment. Relentless Air Racing, LLC, 222 Cal.App.4th at 814-15. The public policy the court had to grapple with is the defendants’ right to give their side of the story during litigation; that is, to present their case to the judge. However, a debtor, who is being added to a pre-existing judgment, does not get such a right.

The court in Relentless Air Racing, LLC., however, found that there are certain situations in which the creditor may add additional debtors.  Three criteria must be met for this to be possible: One, the parties must have had such control in the litigation that led to the judgment that it was as if they were actually represented. Two, the additional debtors and business entity are practically identical. And, three, it would be inequitable to exclude the additional debtors from the judgment. Relentless Air Racing, LLC, 222 Cal.App.4th at 815-16.

Applying these three criteria to the case, the court found the Fultons (1) had full control over their business; (2) they and their business were not separate from one another. They were the sole owners and operators of the business; they freely transferred money from their business account to their personal accounts; they disregarded legal formalities required for LLCs; and they use the labor and service of the LLC for their own gain and for their other business’ gain rather than the gain of the LLC. And (3), as the Fultons had such control of the LLC, and there was no legal difference between the two, the courts inferred that an inequitable result would occur if the Fultons were not added to the judgment. That is, the Fultons could keep Airborne insolvent resulting in Relentless never being paid. Relentless Air Racing, LLC, 222 Cal.App.4th at 814-16.

While this is a good outcome for Relentless, what does it mean for Associations seeking payment of delinquent assessments? When the home is owned by a corporate entity, the Association may be able to add additional debtors to already existing judgments. This provides the Association with an additional outlet for compensation if it is discovered after litigation that the property owner, an entity, is insolvent.

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Legal Update: HOA Gets Injunction to Keep Homeowners’ Dangerous Dogs Out of Common Areas

In a recent California Court of Appeal decision, an Association successfully obtained a permanent injunction prohibiting homeowners from allowing their dangerous dogs to leave their property except for transportation purposes.  Costa Del Sol at Carmel Valley Homeowners Association v. Scott Mitchell et al., 2014 WL 341653 (2014).

The Mitchells moved into the development in 2002 and owned three large German Shepherd dogs.  Mrs. Mitchell often had trouble controlling the dogs when she would take them on walks.  She also allowed the dogs to run unleashed in a nearby undeveloped area.  Beginning in 2006, numerous incidents involving the Mitchell dogs occurred.  On one occasion, two of the dogs charged at a family with young children while Mrs. Mitchell did nothing to try to restrain her dogs.  On another occasion, the three dogs attacked and bit a moving company worker.  Over the next two years, the Mitchell dogs attacked, bit, or acted aggressively towards several other Association workers, residents, and pets.  At one point in 2007, the County Animal Services Department issued a quarantine order for the dogs, which Mrs. Mitchell refused to cooperate with.

In 2008, the Mitchells were notified by the Association that these incidents violated various provisions of the CC&Rs.  The Board conducted a hearing on this matter where it accepted Mr. Mitchell’s offers to make several dog control corrections.  The Mitchells never made these corrections, continued to walk the dogs without the proper leashes, and refused to pay the enforcement fines.  Subsequently, the dogs were responsible for yet another attack on a neighbor’s puppy.  The Board met again and found that the Mitchell dogs “continued to present a serious danger to other persons and animals within the residential development.”  The Mitchells were sent another letter from the Board giving them the opportunity to take certain precautionary steps to better contain their dogs, and again, the Mitchells did nothing to remedy the problem.

In 2010, the Association brought a legal action against the Mitchells, seeking injunctive relief and monetary damages for nonpayment of the enforcement fines on the theories of breach of an equitable servitude (CC&Rs), private and public nuisance, and violation of Civil Code section 3342.5 (“Whenever a dog has bitten a human being on at least two separate occasions, any person… may bring an action against the owner…”).  The court heard twenty witnesses at trial and ruled in favor of the Association on each of its claims.

The trial court found the evidence proved that the Mitchell dogs had “menaced, charged, lunged at, attacked, or bitten persons and other dogs within and about the Development.”  Additionally, the Association substantiated its claim that under the Mitchells’ supervision, their dogs presented “a clear and present danger to the residents and animals of the community without Court intervention.”  The court also emphasized the fact that the Association made many attempts to work with the Mitchells in order to resolve these issues, but the Mitchells were uncooperative.

A permanent injunction prohibiting the Mitchells from allowing their dogs to leave their property except for transportation purposes was issued by the court.  In addition, the court ordered the Mitchells to pay $1,550 in outstanding enforcement fines.  On appeal, the court found no merit in the multiple evidentiary and procedural arguments that the Mitchells presented and affirmed the judgment in favor of the Association.

This case is extremely helpful to homeowners associations because it provides instructions on how to effectively deal with homeowners who have pets that have been proven to be dangerous.  Courts may issue permanent injunctions prohibiting dangerous pets from common areas if the association can show the following: (1) the pet presents a clear and present danger to the other animals and residents of the community and (2) the owner fails to cooperate with efforts made by the association in such a way that court intervention becomes necessary for the safety of the community.

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