Legal Update: Judicial Deference – The Association’s Burden of Proof

Authors: Shani O. Zakay, Esq. and Rachael Harrington

David and Patricia Valentine lived in a two story house situated in the Canyon Hills Community Association. In 2006, they decided to rebuild their home and sought permission from the Association to tear down their current house and rebuild a new one. After obtaining the requisite awareness forms from neighbors and approval from the Association, the Valentines, in 2009, abandoned their original construction plans in exchange for a new, larger, building plan. While the Valentines sought approval from the Association for the new plans, no awareness forms were obtained from the neighbors this time.  When construction began, neighbor Jacklyn Harper was not pleased. Harper filed a suit claiming the Association and the Valentines did not follow the proper procedures as outlined in the architectural application process and the CC&Rs.

The trial court decided Harper had to prove, and did not prove, that the Association failed to act in good faith and in the best interest of the Association. The Court of Appeals, however, found the trial court was wrong. It held that the Association, not Harper, had the burden of proving it acted in good faith. Harper v. Canyon Hills Community Association, 2014 WL 4079930 (2014).

When the governing documents of a common interest development allow the Association to enforce the CC&Rs and other rules and regulations, the Association has a duty to do so in a manner that is fair and reasonable, not arbitrary or capricious. When an Association acts fairly and reasonably, makes reasonable investigations, and acts in good faith and in the best interest of the Association, courts are to give the Board of Directors “judicial deference;” that is, courts are to presume the Board of Directors did act under its authority and in the best interest of the Association. When given judicial deference, the Association, in general, will be the prevailing party in lawsuit.

An issue arises when an Association is sued for failure to act in accordance with the governing documents. In this case, the Association, as the defendant, raised the defense that its actions were in good faith and for the best interest of the Association. Harper, 2014 WL 4 (internal cites omitted).

The Court of Appeal in Harper put the burden of proof on the Association.  It held that it is the Association that must prove it acted in good faith, not the owner, who is claiming the Association breached its duty to the members. Although this case is not published, it refines the meaning of the judicial deference rule. The court will not presume from the onset that the Board of Directors of an Association acted in good faith; rather, the Association will have to prove it acted in good faith in order to be given judicial deference.  As such, the Association bears the burden of proof. Harper, 2014 WL 4-5, 8.

The party that has the burden of proof has a more difficult role in trial as it must provide evidence to support its assertions, which generally makes it more difficult for that party to succeed. It is, therefore, important the Association act reasonably, make reasonable investigation into matters, properly maintain its records, and act in accordance with the governing documents.

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Legal Update: The Drought and How it Will Affect Your HOA

Authors: Shani O. Zakay, Esq. and Rachael Harrington

Say goodbye to the lush green grass that lines the streets of your common interest development. Amidst the drought California is facing, Governor Brown has issued an executive order voiding all CC&R provisions which effectively prohibit homeowners from following government or public agency water conservation measures. While this may not be the end of those vivid green lined streets and yards, it does mean homeowners will be able to plant more succulents and other plants that need less water to thrive.

Lawns should only be watered twice a week, and associations will be barred from fining homeowners who fail to water their lawns during a drought declared state of emergency. If located in Coachella Valley, associations, as well, must join the effort in water conservation as they are now prevented from using potable domestic water to irrigate the common area landscape where non-potable water is available. As instructed, help conserve to make California drought free and say goodbye, for now, to lush green lawns.

This restriction on associations’ ability to enforce their landscaping rules is already in effect.  Therefore, we recommend you consult with your legal counsel before enforcing any rules and regulations that may be affected by the bill. 

For more information regarding the changes to the law, please see AB2104, AB2100, and AB1896. You can search the Assembly Bill at http://leginfo.legislature.ca.gov/faces/billSearchClient.xhtml.

 

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Legal Update: Merchant Builders Have The Right To Use Recreational Facilities & Services

Authors: Shani O. Zakay, Esq. and Mellania Safarian

Recently, the California Court of Appeals released an unpublished decision, entitling a merchant builder to use recreational facilities and services, absent a membership card, and in exchange for paying the mandatory monthly membership and club charges. Mohamed v. Anatolia Units 1, 2 and 4 Master Association, 2014 WL 2871577 (2014).

In 2009, Mohamed purchased 106 vacant lots in Anatolia. He subsequently developed four of those lots and used them as rental properties, while the remaining 102 lots remained undeveloped. As the owner of the 102 vacant lots, Mohamed was assessed $86 in club charges each month for each lot, which according to the CC&R’s is a mandatory requirement for membership in the club and for the right to use the facilities and amenities of the club. Mohamed requested that the association issue him club membership cards for each of the 102 vacant lots he owns, but the association refused. As a result of this refusal, in January 2012, Mohamed commenced this action.

At trial, the association asserted that the CC&R’s do not give Mohamed the right to a club membership card for each of his 102 vacant lots, unless someone is residing in the lot. The association, however, conceded Mohamed’s right to use the club. Mohamed asserted that the association’s refusal to issue him a membership card for each of his vacant lots is tantamount to refusing him access to the club. Since the 102 lots were vacant and undeveloped, the court entered a judgment of dismissal in favor of the association and Mohamed appealed.

The Court of Appeals found that the CC&R’s mention nothing about membership cards, and although the rules do contain provisions stating that a membership card is necessary to use the club, the court agreed with the association that those provisions were not intended to apply to merchant builders, like Mohamed. The rules connect membership cards with occupancy, thus a merchant builder who owns unoccupied lots would not be entitled to membership cards. However, all owners are entitled to use the club in exchange for paying mandatory monthly club charges and merchant builders, like Mohamed, are considered owners. Thus, the court held that Mohamed is not entitled to membership cards, but the CC&R’s unequivocally establish the right of non-occupant merchant builders, like Mohamed, to use the club.

Although the case is unpublished, its precedential value is considerable since it demonstrates how courts are willing to interpret written instruments in a way that gives effect to all provisions; adopting constructions which make the contract reasonable, fair and just. A merchant builder cannot obtain numerous membership cards for vacant lots he/she owns but may nonetheless acquire access to recreational facilities and services offered by the association, so long as the merchant builder pays his monthly club charges and dues.

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Legal Update: Attorney’s Fees Awarded When The Action Seeks To Enforce The CC&Rs

Yang v. 2176 Pacific Homeowners Associations, 2014 WL 3037299 (2014).

In 2010, Yang filed a suit in state court against his Association for claims arising from the towing of his van and alleged “falsely reported” debt against him. However, Yang failed to notify the consumer reporting agency about the dispute regarding the alleged falsely reported debt as was required under the relevant provisions of the Fair Credit Reporting Act (“FRCA”). As a result, the district court dismissed the action arising from the towing of the van and awarded attorneys’ fees to the Association as the prevailing party.

The Court of Appeals affirmed the judgment of the district court but disagreed as to the award of attorney’s fees. The fee provision in the Association’s CC&Rs and the relevant statute provide for attorneys’ fees for the prevailing party in an action initiated to enforce any provision of the governing document. However, the court found that Yang’s action was not properly construed as an action seeking to enforce the CC&Rs but rather as one seeking redress for alleged civil rights violations, so the Association was not entitled to attorneys’ fees.

Although the case is unpublished, its precedential value is considerable since it demonstrates how courts construe relevant statutes and provisions of the CC&Rs when deciding who gets the award of attorneys’ fees. In order to be entitled to attorney’s fees, the action must be properly construed as an action seeking to enforce the rights and obligations of the parties under the CC&Rs.

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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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