2007 Statute and Case Law Update

Published in the ECHO Journal, March 2008                                                                          

Introduction

This summary of legislative and case law developments distills the legal developments in the 2007 calendar year that are important to California community associations.

California law consists not only of the statutes enacted by the Legislature, but also the common law, which is made by the courts in the form of published decisions of the Courts of Appeal and the California Supreme Court. Only a small percentage of all of the cases ruled on by these Courts is certified for publication. These are generally cases that establish a new rule of law, resolve a conflict in the law , involve an issue of continuing public interest, or review the development of a common law rule.

New Legislation

SB 528 – Civil Code Section 1363.05—Agendas

Addressing a perceived loophole in the Open Meeting Act, the Legislature adopted amendments to Civil Code Section 1363.05 requiring that, effective January 1, 2008, the notice of meetings of board of directors of a homeowners association contain an agenda. If the agenda is not provided or is incomplete, action taken by the board of directors at the meeting might well be ultra vires, meaning outside the powers of the board of directors, and illegal. The statute specifically prohibits the board from discussing or taking action on any item at a non-emergency meeting, unless it was placed on the agenda included in the notice that is posted in a prominent place within the common area and mailed to any owner who has requested notification of the board meetings by mail. Alternatively, the notice and agenda may be mailed or delivered to each unit in the development, or the notice may be included in a newsletter or similar form of communication.

The new law allows residents who are not members of the board of directors to speak on issues not on the agenda. It also permits members of the board of directors and the managing or other agent of the board, or a member of the staff of the board, to: (a) briefly respond to statements made or questions posed by a person speaking at the meeting; or (b) ask a question for clarification, make a brief announcement, or make a brief report on his or her own activities, whether in response to questions posed by a member of the association, or based upon his or her own initiative.

Section 1363.03 provides some limited additional opportunities for board communications on items that were not included on the agenda in the notice of meeting. Subject to rules or procedures of the board that may be adopted, the board of directors, or a member of the board may:

1. Provide a reference to, or other resources for, factual information to the managing agent or staff;
2. Request the managing agent to report back to the board of directors at a subsequent meeting concerning any matter, or direct, or take action to direct, the managing agent to place a matter of business on a future agenda;
3. Direct the manager to perform administrative tasks that are necessary to carry out Civil Code Section 1363.05(i), the agenda law;
4. Take action in an emergency situation that was not foreseeable and requires immediate attention and possible action by the board and that makes notice impracticable, upon a determination made by the board by a vote of two-thirds of the board members present at the meeting or, if less than two-thirds of the total membership of the board is present at the meeting, by a unanimous vote of the board members present, that there is a need to take immediate action, and that the need for action came to the attention of the board after the agenda was posted and distributed;
5. Take action on an item that appeared on an agenda posted and distributed for a prior meeting of the board that occurred not more than thirty calendar days before the date action is taken on the item and, at the prior meeting, action on the item was continued to the meeting at which the action is taken with respect to each of these items.

Tip: Routinely post complete agendas in the common area. If there is currently no place to post the agendas, then create such a place in the common area.

AB 691- Business and Professions Code Section 11500—Certification of CID Managers

This bill extends the California law relating to the certification of common interest development managers from January 1, 2008 to January 1, 2012. It also modifies certain of the requirements in order to be designated as a “certified common interest development manager” and makes a number of technical and non-substantive changes to the certification law. It remains the obligation of persons providing the services of a common interest development manager to an association to disclose whether or not they have met the requirements of this statute, so that they may be called a “certified common interest development manager,” the professional association that certified them, and the location of their primary office. The statute also requires the prospective manager to discuss with the board of directors of the association whether the fidelity insurance of the manager or his employer covers the current year’s operating and reserve funds of the association.

Case Law Developments

Fair Housing

Housing Opportunities Project for Excellence, Inc., et al. vs Key Colony No. 4 Condominium Association, Inc., et al., United States District Court for the Southern District of Florida, Miami Division, 2007 U.S. Dist. Lexis 1191(2007)

Housing Opportunities Project for Excellence, Inc. (“HOPE”), a non-profit fair housing organization, sued a condominium association, its board members, and its manager for discrimination against families with children under both the Federal Fair Housing Act and the Florida Fair Housing Act. In particular they alleged that a number of rules adopted and enforced by the Association and its agents actively discriminated against families with children, including certain rules regarding use of the pool, the club, the beach and general restrictions. In 2001 the Association announced that it would enforce occupancy restrictions, limiting the number of occupants to four people on all new rentals and purchases of units. The plaintiffs alleged that enforcement only began in 2003 and then only selectively. One family alleged that they were unable to take occupancy of a unit they purchased because of the birth of a third child. The plaintiffs sought injunctive relief, actual damages, punitive damages, attorney’s fees and costs.

The District Court made the following rulings:

1. A complaint cannot be dismissed for failure to state a cause of action unless it is clear that no set of facts could be proved that would support a claim for relief.
2. The standing challenge against HOPE was unsuccessful because a fair housing agency only has to show the deflection of the agency’s time and money from counseling to legal efforts directed against discrimination to satisfy the legal requirement that the plaintiff must be injured.
3. The standing challenge against two couples with children on the grounds that they did not allege that the occupancy restrictions affected them was unsuccessful. These plaintiffs alleged that they lost important social, professional, business and economic, political and aesthetic benefits of association with other families with children that arise from living in integrated communities free from discriminatory housing policies. The Court found that this was a sufficient pleading of standing.

The defendants claimed that one family waived challenges to the occupancy restriction by purchasing after the four person per unit rule was in place. The Court denied the plaintiff’s motion on the ground that waivers of statutory rights, such as those under the Federal Fair Housing Act, must be “knowing and intentional.” Mere purchase of a unit after the rule was implemented was found insufficient evidence of a waiver.

The Association also moved to dismiss the complaint as to two families on grounds that the two year statute of limitations had expired. These families, according to the complaint, knew of the association’s enforcement of the occupancy more than two years prior to the filing of the complaint. However, the court found that the complaint alleged continuing violations. The Court ruled that when the plaintiff alleges a pattern of discrimination and that practice continues into the limitations period, a complaint may be filed within 180 days of the last occurrence of that practice. Based on these principles, the court dismissed the lawsuit against one of the plaintiffs only, but noted that the defendants retained the right to raise the statute of limitations defense later in the case, not based solely on the complaint allegations.

The motion of the defendants to dismiss the complaint for failure to state a cause of action was denied as to the plaintiffs’ claims for disparate treatment and disparate impact, but was granted as to the claim for retaliation. The disparate treatment claim was found sufficient because the plaintiffs need only allege that other unit owners, similarly situated to themselves, were treated differently than they were on the basis of their familial status, and specifically that the implementation and enforcement of unreasonably low occupancy restrictions and other rules discriminated against families with children.

The disparate impact claim also was found sufficient, the legal requirement being the allegation that a specific policy caused a significant disparate effect on a protected group. The plaintiffs made a short and plain disparate impact claim in the complaint. To succeed at trial, they will be obligated to establish their claim through statistically significant evidence.

The court struck down the plaintiffs’ allegations of retaliation. The retaliation alleged was not against one of the individual plaintiffs who engaged in protected activity, but instead was against other individual plaintiffs in relation to their housing rights. The statutory protection against retaliation does not apply to retaliatory actions against third parties.

The individual board members and the manager asked the court to dismiss the complaint against them because of immunities granted to officers and directors of non-profit corporations under Florida law, and in the case of the manager that she could not be sued as an agent of the corporation. The court denied these motions because the Fair Housing Act allows claims to be made against such individuals if they are alleged to be involved in the discriminatory acts. The court stated that the manager acting in the course and scope of her employment is still liable for her own unlawful conduct, noting that an agent has no obligation to carry out her principal’s order to do an illegal act.

Tip: The governing documents of associations must be scrutinized to determine whether they may violate the federal Fair Housing Act. Any provisions in violation of the Act must be removed. Occupancy restrictions and rules and restrictions that focus on the behavior of children are potentially subject to legal challenge as “familial discrimination” under the Fair Housing Act. Rules that are intended to protect children from danger may be legally attacked by parents who view the restrictions as unfairly targeting families with children. Managers must refuse to act on requests from the board that may violate the Fair Housing Act and must document their position. Liability insurance and directors and officers policies should be carefully reviewed for coverage of fair housing claims.

Governing Document Enforcement

Haley vs. Casa Del Rey Homeowners Association, 153 Cal.App. 4^th 863 (2007)

This condominium project consisted of nine first floor units and nine second story units. The first story unit owners over time expanded out their concrete patios into the unrestricted common area. The Haleys lived on the first floor; but in 2003 they demanded all lower unit owners to remove encroachments into the common area, although they previously had encroached themselves. In reply, the Association demanded that all lower unit owners remove their encroachments.

However, the Association also submitted an amendment to the CC&Rs for membership approval that authorized the Association to permit first floor patio extensions into the unrestricted common area, subject to certain design requirements to protect the privacy interests of neighbors.

The Haleys sued the Association and past and present board members, contending that the Association was not enforcing the CC&Rs reasonably and in good faith by pursuing the amendment to the CC&Rs at the same time as it asked, but did not force, owners to remove encroachments, for example, by filing lawsuits.

The trial court and Court of Appeal ruled in favor of the Association, finding that the actions taken by the Association were reasonable and practical under the circumstances. Of critical importance is the ruling of the Court of Appeal that the decision of the California Supreme Court in Lamden vs. La Jolla Shores Clubdominium Homeowners Association, 21 Cal.4th 249 (1999), extended not only to board decisions regarding the method of maintenance of the subdivision, but also to decisions on the method for addressing violations of the governing documents. The Court recognized that the board had good faith discretion to avoid expensive and time-consuming litigation, and could pursue other remedies to address violations of the governing documents.

The Haley court’s extension of the Lamden doctrine to association enforcement decisions is a welcome development. It means that board members can evaluate costs and risks, as well as benefits, in considering other resolutions to violations of the governing documents, including possibly amending the governing documents.

Tip: Boards have a duty to enforce the CC&Rs and may do so through demand letters, the meet and confer procedure, the request for resolution procedure, fines, suspension of privileges, and litigation. Boards should carefully assess the benefits and costs of these alternative procedures and document the business judgment supporting the enforcement strategy.

Workers Compensation Liability

Heiman vs. Workers Compensation Appeals Bd., 149 Cal.App.4th 724 (2007)

This lengthy opinion concerns the liability of a property manager for a condominium association, and the condominium association itself, for workers compensation to an injured employee. The association directed that its property manager replace the rain gutters on the condominium building. The manager hired an unlicensed contractor, Rube’s Rain Gutter Service, to do the job. Rube’s was uninsured for workers compensation. On the first day of the job, a rain gutter held by an employee contacted a high voltage electrical wire and severely shocked and injured the employee. The injured employee claimed permanent disability, filed for workers compensation benefits naming as his employer the manager, the association and individual condominium owners.

The Court of Appeal noted that under California law, unlicensed contractors are deemed to be employees for workers compensation purposes. The court further held that there could be dual employers of an injured employee for this purpose, including the unlicensed gutter service and the association’s management agent. The court went on to find that the manager was the association’s agent, and that the association was not exempt from liability based on “personal” services because the rain gutter repair and installation was in the “trade, business” of the association. However, the court held that the individual owners were not liable for workers compensation as an “employer” because the injured employee did not work sufficient hours and the owners, as principals, have statutory immunity under the Labor Code.

The Court did not address any indemnity obligations of the association to the manager under the management contract.

Tip: Homeowners associations and their managers should diligently verify that each contractor performing operations on the property is duly licensed for the work to be performed and is adequately insured for liability and workers compensation.

Management Charges

Berryman vs. Merit Property Management, Inc., 152 Cal.App.4th 1544 (2007)

The plaintiffs were trustees of a trust which sold a home located in two associations managed by Merit Property Management, Inc. They sued Merit alleging that Merit charged them $100 in documents fees and $450 in transfer fees in the two transactions, one-half of which was paid by the buyers. These fees were retained by Merit and not paid to their association clients. The plaintiffs filed a class action alleging various claims against Merit for its document and transfer fees, and in particular that the fees were in excess of those permitted by California Civil Code Section 1368. The plaintiff’s motion was dismissed in pre-trial proceedings.

In upholding the validity of the transfer charges imposed by Merit, the Court of Appeal relied on its earlier decision in Brown vs. Professional Community Management, Inc., 127 Cal.App.4th 532 (2005). Brown held that Civil Code Section 1366.1 did not apply to management companies. That statute prohibits an association from imposing or collecting an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied. The Brown court concluded that management companies were not Aassociations@ within the meaning of that statute.

Following the same reasoning, Berryman held that Civil Code Section 1368(b), which permits an association to charge a reasonable fee for the service of providing certain documents in escrow based on the association’s actual cost, did not apply to a management company. Berryman held that both Civil Code Section 1366.1 and 1368 permit vendors to homeowners associations to make a profit for itself, although that profit would be prohibited if the service was provided by the association directly.

The plaintiff’s causes of action against Merit, including violation of the Unfair Competition Law, Consumers Legal Remedies Act, unjust enrichment, constructive trust, accounting, breach of fiduciary duty, negligence and money had and received, all failed based upon the Court’s finding that a management company could impose charges that include a profit without violating Civil Code Section 1368.

Tip: Although management companies may make a profit on charges to the homeowners association, associations must continue to limit their own fees for transfer documents to those which can be justified based on actual expenses.

Manager Liability

Queen Villas Homeowners Association vs. TCB Property Management, 149 Cal.App. 4^th 1 (2007)

A member of the board of directors of the association received about $134,000 of association money for allegedly providing “extraordinary services” to facilitate the association’s construction defect litigation. She was paid from the association’s checking account with the tacit agreement of the association’s property management company, TCB Property Management. When a dispute arose between the parties, the association filed suit against TCB, claiming that it had breached its duties to the association by failing to prevent the director’s self-dealing or bring it to the attention of the rest of the board of directors.

The property management company sought to be released from the litigation based on its management contract, which included an obligation by the association to indemnify, defend and hold the agent and its employees harmless against any and all claims and attorney’s fees arising out of the performance of the agreement. On this basis, the trial court released the management company from the lawsuit.

On appeal, TCB was ruled to be potentially liable to the association despite the indemnity agreement in the management contract. The Appellate Court held that indemnification and hold harmless obligations normally deal with third party claims, such as a claim against the manager by a guest who is injured on the property. The indemnity and hold harmless clause in the manager’s contract was not interpreted as an exculpatory clause vis-a-vis the homeowners association and the manager.

Tip: It is the board’s responsibility to verify that payments to the property manager and to consultants are appropriate and justified.

Directors and Officers Coverage

Marquez Knolls Property Owners Association, Inc. vs. Executive Risk Indemnity, Inc., 153 Cal.App.4th 228 (2007)

A homeowner brought suit against the association asserting claims of fraud and breach of duty. The main activity of this association was to mediate disputes between members over the covenants, conditions and restrictions on their properties which, among other things, included a restriction of the erection of structures that obstruct views from other lots. The directors and officers carrier for the association disputed any responsibility to defend or indemnify the association with respect a dispute concerning the association’s efforts to mediate a dispute between two members concerning construction that blocked the view of another owner.

The position of the insurance carrier was that there was no coverage because of an exclusion for development, planning or landscaping of any real property and the design, construction, renovation or rehabilitation of any building, structure or other improvement on any real property. The Court of Appeal held that the exclusions relied upon by the carrier were not applicable because the association itself was not developing, planning, designing, constructing, renovating or rehabilitating any building. The Court noted the important principle that coverage clauses in insurance policies are interpreted broadly, while exclusionary clauses are construed narrowly against the insurer.

Tip: Where significant claims are involved, denials by the insurance company of coverage should be evaluated by insurance counsel.

Criminal Activity

Castaneda v. Olsher, 41 Cal.4th 1205 (2007)

Although this case arises out of a shooting in a mobile home park, the principles are directly applicable to common interest developments. The plaintiff was shot and injured while a bystander to a gang confrontation involving a resident of the mobile home across the street from his. He sued the mobile home park owner contending that the owner had breached a duty not to rent to known gang members, or a duty to evict them when they harass other tenants. In this case, a known gang member was occupying the mobile home across from the victim and was interacting with groups of individuals who were engaging in what as arguably gang-related activity, including two prior gunshot incidents.

In determining the extent of the duty of the property owner to protect residents from criminal activities, the California Supreme Court stated that a court must evaluate the foreseeability of the harm to the plaintiff, the degree of certainty that the plaintiff suffered the injury, the closeness of the connection between the defendant’s conduct and the injuries suffered, the moral blame attached to the defendant’s conduct, the policy of preventing future harm, the extent of the burden to the defendant, the consequences to the community of imposing a duty to exercise care with resulting liability for the breach, and the availability, cost, and prevalence of insurance for the risk involved.

The Supreme Court ruled that landlords do not have a duty to refuse to rent to gang members. The Court recognized the difficulty of identifying who is actually a gang member, and raised concern that fair housing laws would be violated by the effort to screen them. The Court also held that owners cannot have a duty to evict gang member tenants which could subject the landlord or property manager to retaliatory harassment or violence, so the courts in California have recognized a duty to evict a vicious or dangerous tenant only in cases where the tenant’s behavior made violence towards neighbors or others on the premises highly foreseeable.

However, it noted that California law does impose on a landowner a duty to protect tenants and other business invitees from foreseeable attacks by gangs and drug dealers on the premises. The Court ruled that under the specific facts of this case, a shoot-out between two rival gangs was not highly foreseeable and that the landlord did not have a tort duty to prevent it by evicting the gang member.

The plaintiff alternatively argued that the mobile home park had a duty to hire and deploy security guards to prevent gang violence and maintain brighter lights in the common areas. Under California law, to impose a burdensome duty such as hiring security guards, the plaintiff must show the existence of prior similar acts on the premises or sufficiently serious indications of reasonably foreseeable risk of violent criminal assaults. The Court noted that under the circumstances of the gang confrontation in this case, it is doubtful that a security guard or increased lighting could have prevented the violence.

Tip: Homeowners associations are potentially liable for injuries arising from criminal activity. Measured steps should be taken to respond to this risk, and the efforts should be fully documented.

Criminal Activity

Barber vs. Wu-Ye Chang, 151 Cal.App.4th 1456 (2007)

A former tenant in a four-unit apartment complex, Barber, was shot by a tenant in the complex, who had exhibited bizarre and occasionally violent behavior. For example, another tenant wrote the landlord that the shooter had brandished a gun and uttered threats. The landlord admitted in his deposition that he believed the information provided in this letter. The trial court granted a pre-trial motion determining that the landlord had no liability. On appeal, this decision was reversed. The appellate court held that based on the gun brandishing incident, the landlord had a duty of care to take certain security measures, although less than hiring security guards. The Court ruled that whether a particular protective measure falls within the scope of a landlord’s duty of care, or is precluded as a matter of law, depends on “sliding scale balancing formula” that weighs foreseeability against the burden of attending the measure.

Tip: Where a homeowners association board is aware of actual criminal activity, it has a duty to undertake a response to promote safety in the common area. At a minimum, this includes filing a police report. If the recommendations of a qualified security consultant are followed, the board may be protected from liability.

Construction Defects

El Escorial Owner’s Association vs. DLC Plastering, Inc., 154 Cal.App.4th 1337 (2007)

A condominium homeowners association settled its construction defect case with multiple parties prior to trial and proceeded to trial as to other defendants, including DLC Plastering, Inc. and Alderman Construction, Inc. The trial court found that these parties’ latent construction defects caused $8.6 million in damages, but gave them credit for pre-trial good faith settlements between the homeowners association and other contractors. These settlements reduced the obligation of the non-settling parties to $2,461,495.

In a lengthy decision, the Court of Appeal found that:

1. The homeowners association could not state a valid nuisance cause of action;
2. The pre-trial good faith settlement proceedings were adversarial and fair;
3. The court gave proper settlement credits to DLC and Alderman;
4. The statue of limitations was tolled by the Calderon Act;
5. The trial court properly rejected Alderman’s claim that it was exempt from liability because it complied with the project’s building plans;
6. The court properly awarded the homeowners association its experts’ fees as damages, among other rulings.

Importantly, the Court held that with respect to the allocation of pre-trial settlements, the court may make adjustments after receiving evidence to ensure that the non-settling defendants do not shoulder liability for acts they did not commit, or be saddled with excessive or disproportionate damages. As to the statue of limitations, the Court found that the Calderon Act permits extended tolling by agreement of the parties and does not limit when the agreement must be made, nor does it restrict the language the parties must use about the tolling period.

Alderman claimed exemption from liability because it followed plans and specifications for the construction project. However, the plans did not detail how Alderman was to attach newly constructed walls to the original construction. Those walls did not secure a watertight connection. Accordingly, the Court found that Alderman did not comply with the legal standard of “due care” or the common law duty to perform with care, skill, reasonable expedience, and faithfulness the thing agreed to be done, and that a negligent failure to observe any of these conditions was a tort, as well as a breach of contract.

Tip: Protect the statute of limitations for construction defects by service of a Calderon notice and extensions of Calderon, if necessary. Make direct claims against subcontractors and do not rely solely on suit against the developer. Recognize that a subcontractor’s compliance with plans is not necessarily a defense to negligent workmanship.

Crestmar Owners Association v. Stapakis, 2007 Cal.App. Lexis 2019 (2007)

Stapakis owned the corporation that developed a Long Beach building into condominiums. The CC&Rs required the transfer of all unassigned parking spaces to the Association by the early 1980’s. In 2004, the development corporation transferred two unassigned parking spaces to Stapakis, who demanded that the Association let him use the spaces for his personal uses, and that it pay a quarter century’s worth of back-rent for its use of the two spaces since the early 1980’s. When the Association refused, the developer sued. In response, the Association sued the developer to cancel the deeds and quite title to the two spaces.

The importance of this case is that the statute of limitations on the Association’s lawsuit to quiet title to the parking spaces was held to commence when the developer pressed an adverse claim against it, so that the Association’s lawsuit was timely because it was filed within four years of the demand for possession of the spaces. The developer’s corporation was found to be the “alter ego” of Stapakis for purposes of imposing on him liability for the Association’s attorneys fees of more than $20,000, plus costs on appeal.