2022 HOA Case Law Review
By Nicholas A. Rogers, Esq.
California Appellate Courts issued several important opinions addressing issues in community association law in 2022, including whether to award prevailing party attorney fees in an election challenge, affirming rules relating to Strategic Lawsuits Against Public Participation (SLAPP), the importance of complying with the pre-litigation Alternative Dispute Resolution (ADR) requirements, the consequence of failing to accurately complete an application for association insurance, and the role of equity in enforcement disputes.
PREVAILING PARTY ATTORNEY FEES
Artus v. Gramercy Towers Condominium Association (2022) 76 Cal.App.5th 1043
The Davis-Stirling Common Interest Development Act (CID Act) provides that in an action to enforce the governing documents, the prevailing party is awarded reasonable attorney fees and costs. A long line of published appellate opinions have affirmed a prevailing party’s right to such fees is mandatory. In Artus v. Gramercy Towers Condominium Association ("Artus"), the first appellate district determined the general rule applicable to governing document disputes does not necessarily apply to disputes arising from different sections of the CID Act.
In Artus, a condominium owner sued her association seeking equitable relief for violating provisions of the CID Act that regulate member elections and rulemaking authority. Following a pleading battle that did not dispose of the action, the association adopted new election and operating rules, and the parties stipulated the remaining issues were moot. Each party then moved for prevailing party attorney fees. The trial court denied both requests and both parties appealed.
The appellate court affirmed the trial court’s ruling in holding neither party achieved their primary litigation objectives and, thus, were not entitled to fees. In doing so, the appellate court reasoned that although plaintiff’s action resulted in the adoption of new election rules, its practical effect did little more than force the association "to incur greater effort in preparing its notice materials for proposed rule changes," which was of questionable significance because it would "likely result in higher assessments" to avoid future lawsuits from the plaintiff (Artus, supra, 76 Cal.App.5th at 1055). The court also rejected the association’s argument that its unilateral decision to amend the election and other operating rules rendered it the prevailing party (Artus, supra, 76 Cal.App.5th at 1059).
Tips for Associations: Don’t be afraid of creative solutions when litigating claims that can resolve or, at the very least, strengthen positions by changing rules and policies while litigation is pending. Such changes may deprive the association of prevailing party fees at the end of a case, but also might mitigate exposure to paying prevailing party fees. Practitioners should also take note that the general rule that an award of prevailing party fees is mandatory in enforcement actions does not necessarily apply to an election challenge arising from Civil Code section 5145.
ANTI-SLAPP MOTIONS
Doppes v. Norton ( 2022) 2022 WL 4244482
In California, a cause of action arising from a person’s right to petition or free speech in connection with a public issue is subject to a special motion to strike known as an anti-SLAPP motion. The motion is a potentially powerful tool an association and its agents may use at the outset of litigation resolved through a two-step process. The defendant must first establish that the challenged allegations or claims arise out of a protected activity. If the defendant meets this burden, then the burden shifts to the plaintiff to demonstrate the claims have, at the very least, minimal merit by producing actual evidence that satisfies each element of the subject claim.
Prior to 2016, if a claim relied on allegations sounding in both protected activities (i.e., free speech) and unprotected activities (e.g., violation of the CID Act), a court was forced to discern the "gravamen," or "gist," of each cause of action to determine whether the defendant met its initial burden. Our Supreme Court rejected that analysis in favor of a claim-by-claim approach that permits a defendant to strike protected allegations from the pleading if the plaintiff is unable to demonstrate minimal merit.
In Doppes v. Norton ("Doppes"), a member filed a derivative suit against individual directors who volunteered on the board of his association. He claimed the directors improperly approved heightened fines for architectural violations and fees to cover increased road maintenance costs. He also alleged the directors breached their fiduciary duties by secretly negotiating and secretly agreeing with certain homeowners to reduce their fines and fees.
The individual directors filed an anti-SLAPP motion arguing the gravamen of the member’s claims arose from protected activities that did not have minimal merit (i.e., their votes in favor of increased fines and fees). The trial court agreed and granted the motion. The appellate court affirmed in part, reversed in part, and remanded the case to the trial court for further handling. To the extent the member’s claims arose from allegations the directors voted to approve increased fines and fees, those allegations were struck from the member’s complaint. However, the court also held that allegations that the directors engaged in secret negotiations and secret agreements were not protected, which permitted certain claims to proceed.
Tips for Associations: Doppes is one of at least four unpublished opinions analyzing the SLAPP statute in the context of community association law this past year. The takeaway is if a volunteer director or association is sued, management should promptly notify the association’s corporate counsel and tender the claim to the association’s insurer so prompt determination of whether the suit is subject to an anti-SLAPP motion can be made. A growing body of law recognizes that statements and decisions in board meetings, as well as board conduct outside meetings that related to matters of public concern, are protected from suit. However, the deadline to file such motions is 60 days from service of the complaint, which is early in the litigation cycle. So, time is of the essence as sitting on a complaint can prevent a defendant from using this powerful tool to potentially extricate volunteer directors or the association from prolonged suit and permit the recovery of prevailing party attorney fees.
PRELITIGATION ALTERNATIVE DISPUTE RESOLUTION
Mayfair Homeowners Association v. Deol (2022) 2022 WL 1043649
The CID Act requires a party that commences an action to enforce the governing documents, provisions of the CID Act, or relevant provisions of the Corporations Code to file a certificate with their complaint either:
- affirming the parties completed alternate dispute resolution ("ADR"),
- one of the other parties did not accept terms offered to complete ADR, or
- preliminary or injunctive relief was necessary.
This requirement applies to actions that solely seek equitable relief or equitable relief combined with monetary damage in sums that do not exceed the jurisdictional limit for small claims court.
In Mayfair Homeowners Association v. Deol ("Mayfair"), an association filed suit to enforce the CC&Rs arising from a member’s failure to maintain his property and timely rebuild his home. The dispute proceeded to a bench trial, in which the association prevailed. The member appealed. His main contention on appeal was that the association failed to prove it had complied with the CID Act’s statutory prerequisites to file an enforcement action. The appellate court agreed and reversed the judgment. In doing so, the appellate court reasoned that the CID Act’s pre-litigation ADR requirements are substantive and, therefore, must be plead and proved to sustain judgment.
Tips for Associations: The obvious takeaway from Mayfair is that an association (or member) must offer ADR prior to initiating an enforcement action as the failure to do so creates a potential pleading defect and a failure of proof that can void judgment. The less obvious takeaway from Mayfair is the importance of documenting compliance with the statute through proofs of service and other litigation tools that evidence the association complied with its prelitigation ADR requirements. Notably in Mayfair, the association’s complaint included a document purporting to offer ADR that was sent to the member prior to litigation. However, the association did not offer actual proof of compliance at trial even though the member argued he never received the ADR demand. This created an evidentiary issue that, in the appellate court’s opinion, supported reversal. While this decision is not published and therefore does not create binding precedent (which is good because the reasoning is questionable), it serves as an important reminder to create a record evidencing the ADR demand was sent to the address on record, that such compliance is expressly plead in any subsequent lawsuit, and that proof of compliance was entered into evidence at trial.
INSURANCE APPLICATIONS
Atain Specialty Insurance Company v. Lake Lindero Homeowners Association (2022) 2022 WL 355609
In California, a material misrepresentation or concealment in an insurance application, whether intentional or not, entitles the insurer to rescind the insurance policy as though it never existed. In Atain Specialty Insurance Company v. Lake Lindero Homeowners Association ("Atain"), a management company sued an association for breach of contract arising from a terminated management agreement. The dispute arose before the association filled out an application for liability insurance. The application requested the association disclose whether it was aware of "any fact, circumstance or situation" that could result in a claim against the association or its directors. The association disclosed nothing in response.
When the management company sued the association, the association’s insurer sued seeking to rescind the policy and its duty to defend the association in the underlying litigation. The insurer offered the following to support its motion for summary judgment: (a) by the time the application was completed, the recently elected board president had run on a platform of terminating the association’s existing management agreement, (b) the new board had sent eight letters to the management company claiming breach and threatening termination, and (c) the association had received a letter from a member threatening legal action if the board followed through with its termination threat. Based on these undisputed facts, the trial court granted the insurer’s motion and the appellate court affirmed the ruling as the undisclosed facts were material to the insurer’s underwriting decision.
Tips for Associations: Completing insurance applications is not a routine or pro forma exercise. Management should not complete such applications without actual and active participation from the board. Considering the potential for change in management firms, change in managers, and a change in directors, management and the board should work together to ensure a good faith and diligent search of association records is completed to determine whether the board is on actual or constructive notice of potential claim that must be disclosed during the underwriting process. Failure to do so can have severe consequences resulting in the need to self-insure the defense of an otherwise covered claim like in Atain.
BALANCING THE HARDSHIPS IN ENFORCEMENT DISPUTES
Schwindt v. Omar (2022) 2022 WL 1550691
In Schwindt v. Omar, members constructed a room addition with association approval. Their neighbor sued claiming the improvement was constructed in a prohibited patio area and unreasonably interfered with their view in violation of the CC&Rs. The neighbor sued the member who constructed the addition, and following a bench trial, the trial court issued an injunction ordering the improvement demolished. The constructing member appealed, and the appellate court reversed because the trial court failed to address whether the room addition was built in the prohibited patio area in its written decision.
On remand, a different trial court judge conducted a second bench trial that included a site visit. This time, the court found the constructing owner built the improvement in the prohibited patio area, but also found the board was not arbitrary or capricious when it determined the addition did not unreasonably interfere with the neighbor’s view. As such, the court denied the requested injunction relying on an equitable defense known as "balancing the hardships." In other words, the hardship that would result if the member was forced to demolish the room addition outweighed the hardship the neighboring member suffered from "a slightly reduced view," and because of that there was no basis to issue the requested injunction requiring demolition.
Tips for Associations: In any action brought by an association to abate a violation sounding in the construction of unapproved structures, including structures that encroach into common area or easements, it is important to determine whether the hardships caused by the violation weigh in the association’s favor. Relevant factors are whether (i) the violator was innocent, as opposed to willful or negligent in violating the governing documents, (ii) the association or its membership will not be harmed by the violation, and (iii) the hardship caused by removing the improvement outweighs the hardship caused by leaving it in place.
Nicholas A. Rogers, Esq. is a founding partner of O’Toole Rogers, LLP, a community association law firm. He and his partner, Andrea L. O’Toole, Esq., who contributed to this article, have been practicing law for nearly 40 years combined.