Published in the ECHO Journal, March 2007
This summary of case law and legislative developments distills the legal developments in the 2006 calendar year. In Part I—Case Law, summaries are given of cases that are of importance to community associations. The full text of the cases discussed in the article can be found at http://www.findlaw.com/cacases/. Part II—Statutory Law will follow in the April issue of the ECHO Journal.
Case Law
Cebular v. Cooper Arms Homeowners Association
142 Cal. App. 4th 1006 (2006)
Petition for review denied 2006 Cal Lexis 13569
This case concerned to challenge by a homeowner to the method of allocation of assessments in a condominium project. The assessments in the condominium project were allocated on the basis of assigned shares, which also determined the voting rights. The shares were assigned without reference to size or location of the unit. In fact, some larger units had fewer shares. The owner contended that the distribution of shares was inequitable, arbitrary and capricious and argued that the distribution of assessments should be reallocated on an equal basis because the members were entitled to equally share the common area of the subdivision. The owner further challenged the assessments as an unfair business practice in violation of Business and Professions Code Section 17200 and as a violation of Corporations Code Section 7312.
The Court noted that when the project was converted from a stock cooperative to a condominium project, 75 percent of the owners agreed to maintain the method of allocation of assessments in the condominium declaration and bylaws that had prevailed under the original 1925 stock cooperative’s documents. Apparently, the original shares were allocated based on the purchase price of the residences, without regard to the size of the living space or the actual maintenance, repair and replacement obligations attributable to each unit.
The California Court of Appeal upheld the trial court’s ruling that the method of assessment for maintenance of common area facilities was valid. In doing so, the Court emphasized the principle that the covenants and restrictions in a declaration of a common interest development are enforceable equitable servitude, unless unreasonable. This principle of deference to equitable servitude in common interest developments is required by California Civil Code Section 1354. It has been interpreted by the California Supreme Court in Nahrstedt v. Lakeside Village Condominium Assn., 8 Cal 4th at 379-380, 382, 389, to mean that covenants, conditions or restrictions are enforceable unless the party challenging it establishes the equitable servitude to be “unreasonable” because it violates a fundamental public policy or imposes a burden on the use of the affected land that far outweighs any benefit.
The Court noted that neither the Davis-Stirling Act nor the California Code of Regulations requires equal assessments to imposed in every case. In particular, no statute or regulation in California prohibits the allocation of assessments on an unequal basis that is related to voting power in the governance of the community.
Rejecting the owner’s argument that the assessment allocation scheme was arbitrary, the Court found that there was a rational relationship between the greater voting rights of owners, which meant more control over the management and maintenance of the property, and that the higher assessments that were directly tied to voting rights. The Court pointed out that under the governing documents, voting power was directly related to the power to amend the documents, including potentially the method for collecting assessments, the power to call special meetings, the election and removal of directors, and other important association election issues.
The Court further rejected the owners’ challenge that the assessment formula violated public policy that affects the public at large. In fact, the Court found that failure to uphold the allocation formula would disrupt the fundamental public policy of upholding the expectation of the other unit owners, 75 percent of whom had voted to continue the assessment allocation formula when the building converted to condominium ownership.
Plaintiff contended that the assessments scheme violated Civil Code Section 1366.1, which prohibits excessive assessments, as the members shared equally in the benefits of the common areas. He further argued that the assessments scheme violated his rights under Civil Code section 1368.1 because the assessment and voting rights unfairly and unreasonably restricted the marketability of his condominium. He further cited Civil Code Section 1357.110, which prohibits unreasonable rules. Each of these points was found to be unsupported based on the particular facts of the case.
Finally, the owner challenged the assessment scheme under Corporations Code Section 7312, which generally prohibits persons from holding different categories of membership in a nonprofit mutual benefit corporation, subject to certain specific exceptions. The Court found that the articles of incorporation of the association created one type of membership, and that the governing documents lawfully created different rights and conditions of membership as allowed by Corporations Code Section 5330.
The appellate court therefore upheld the judgment of the trial court, and further awarded the homeowners association its attorney’s fees and costs on appeal.
Elnekave v. Via Dolce Homeowners Association
142 Cal. App. 4th 1193 (2006)
In this case, a court-approved settlement between homeowners and their homeowner association was set aside. Homeowners sued their neighbors and their association for mold damage from a water leak, which required the owners to pay for expensive repairs. At a court-supervised mandatory settlement conference, an oral settlement was reached and put on the record. Present at the hearing were one of the homeowners, a representative from the management company of the association, a representative from the homeowner association’s insurance company, and the attorneys for each of the parties. The management representative told the court she had the authority to settle for the homeowners association.
The oral agreement called for payment by the association’s insurer of $65,000 and payment by the neighbors of $60,000, a dismissal of the lawsuit, and mutual releases. Subsequently, the parties were unable to agree on a written settlement, primarily because the attorneys for the association and the homeowners could not agree on the scope of the release regarding enforcement of the CC&Rs for any problems with the repair work. The association opposed a motion by the homeowners to enforce the settlement for two reasons. The association wanted to reserve its right to enforce the CC&Rs based two considerations: (1) a steam shower the homeowners added in place of their old shower, and (2) that the employee of the outside property management firm, despite her statement of authority, could not bind the association’s board of directors. The association was concerned that the homeowners had installed the steam shower without using a licensed contractor and without conforming to local building codes. The association wanted to preserve its rights against the owners related to this construction, but it did not oppose a release of the mold remediation repairs.
The appellate court found that the settlement agreement, although placed on the record in court, was unenforceable because the association was not represented by an officer or director. California case law requires the personal presence of the litigants in court to bind the party to an oral settlement to ensure that the settlement is the result of mature reflection and deliberate intent. The court agreed with the homeowner association that there was no evidence that the insurance carrier for the association had the right to settle without the association’s consent. The court found that the purported settlement prejudiced the association’s right, separate from payment by the insurer, because the settlement limited its ability to enforce the CC&Rs for noncompliance. Accordingly, the insurance carrier could not bind the association without its direct consent in court.
Farber v. Bay View Terrace Homeowners Association
141 Cal. App. 4th 1007 (2006)
The buyer of a condominium made a claim against the seller and the homeowner association because of damages from extensive roof leaks and the prospect of paying a $15,000 assessment by the association to make repairs. The seller contended that the association was solely responsible for the damages and sued the buyer and the association for a determination of her rights and duties under the CC&Rs as against the buyer and the association.
The buyer filed a cross-complaint against the seller, and the seller filed a cross-complaint against the association for indemnity and declaratory relief. The association filed procedural challenges against the seller’s complaint and cross-complaint on grounds that the seller lacked standing to enforce the CC&Rs. At the trial court level the association prevailed and was awarded $24,517 in attorney’s fees.
The appellate court agreed with the trial court that the seller of a condominium does not have standing to enforce the CC&Rs. Regardless of the technical causes of action asserted by the seller, her claim was one to enforce the CC&Rs by seeking a determination that the association was responsible for repair of the roof. The court reviewed objections to the fees awarded in favor of the association and ruled against the seller on each point. Moreover the Court awarded the association its costs on appeal which would include additional attorney’s fees.
Peak Investments et al. v. South Peak Homeowners Association
140 Cal. App. 4th 1363 (2006)
This case concerns the interpretation of California Civil Code Section 1356. This statute permits the superior court to amend the CC&Rs upon a vote of a majority of the members when the declaration requires a supermajority vote. In this case, the amendment was championed by owners of one lot to reduce the setback requirements for their home. The CC&Rs controlled the maximum height of residences as well as front, side lot and rear lot setbacks. Through an apparent typographical error in a prior amendment, the front and rear setbacks for this owner’s lot were increased from 20 feet to 25 feet. The attorney who drafted the prior amendment prepared a correcting amendment, but the board declined to sign it. The homeowners then called a special meeting of the members to try to correct the error. The amendment required the vote of two thirds of the lot owners or 42 of the total 63 owners. At the meeting, 32 ballots were cast and 21 voted in favor of the amendment. The trial court approved the owner’s petition under Civil Code Section 1356, ruling that a majority of the quorum of the owners was sufficient to empower the court to reduce the CC&Rs amendment requirement.
On appeal, the decision of the trial court was reversed. The appellate court interpreted Civil Code Section 1365 to require that more than 50 percent of all of the votes in the association approve the amendment as a minimum jurisdictional requirement for the court to override the supermajority amendment requirement. The court concluded that the California Legislature made a conscious decision to require that at least a bare majority of all the members would be necessary before the court could reduce the voting requirement.
Although the court found that the petition under Civil Code Section 1356 had to be denied, it specifically noted that the owners may have other remedies to achieve their objectives. It stated that nothing in the opinion would hamper the owner’s ongoing efforts to correct the “scrivener’s error.”
Jeffrey A. Barnett is an association attorney with legal offices in San Jose. He is a member of the Legal, Central Coast and South Bay Resource Panels ,the ECHO Legislative Committee and a past member of ECHO’s board of directors. He also frequently speaks at various ECHO seminars and writes for the ECHO Journal.