2010 Statute and Case Law Update Part II: Case Law Developments

Published in the ECHO Journal, February 2011

Introduction

This article provides a summary of statutory and case law developments for the calendar year 2010. Part I, printed in the January 2011 issue of the Journal offered a discussion of legislation of interest to the common interest development industry that has been enacted as law, as well as bills that were vetoed by the Governor or died in Committee. Part II, printed below, will address important decisions that affect common interest development housing handed down by the California courts during 2010.

1. Mansouri vs. Superior Court of Placer County (Fleur Du Lac Estates Association), 181 Cal.App. 4^th 633 (2010)

   The association obtained a court order compelling arbitration of its dispute with Ms. Mansouri concerning the remodeling of her condominium patio. The trial court made an order compelling arbitration and granted attorney’s fees to the association. Ms. Mansouri appealed, challenging the enforceability and conscionability of the CC&Rs clause, application of the arbitration clause to the dispute, and whether the association complied with applicable statutory requirements for the petition to compel arbitration.

   Here the Court of Appeal found the arbitration provision to be enforceable, not unconscionable, and applicable. However, it concluded that the association erred in failing to properly demand arbitration under the arbitration agreement and establish to the Court that the other party had refused to arbitrate under the agreement prior to petitioning the Court for an order to compel arbitration. Therefore, the Court of Appeal overturned the trial court’s order compelling arbitration and attorneys fees and awarded the homeowner her attorney’s fees on appeal.

   The concern of the Court of Appeal in this decision is that the arbitration provision in the CC&Rs required a panel of three persons, whereas the communications from the association to the owner proposed binding arbitration with one arbitrator only. The Court discounted the association’s argument that the owner never indicated a desire to arbitrate the dispute at all. The lesson from this case is that alternative dispute resolution policies in the governing documents of the association must be strictly followed if the legal system is to enforce that procedure.

2. Clear Lake Riviera Community Association vs. Cramer, 182 Cal.App. 4^th 459 (2010)

   In this case, the Cramers were homeowners who sought architectural approval for the construction of a residence. It was approved by the architectural committee, subject to an association guideline that limited the height of homes within the development. The Cramer’s home was located on a sloping lot, so compliance with the height restriction depended upon the location of the residence on the lot.

   During construction the association notified the owners that the location of the home would result in a violation of the height guideline. The owners proceeded with construction of the residence despite this warning. The as-built residence exceeded the height guideline by 9 feet and impaired the views of two neighbors. The association filed suit to order the defendants to bring their home into compliance. The trial court so ordered, and that order was affirmed on appeal.

   Important rulings by the court of appeal include the following:

   1. Circumstantial evidence was sufficient to prove that the height guideline was validly adopted. The Court enforced the guideline even though there were no minutes of its approval. The height guideline was included in printed form and was distributed to all prospective builders. The guideline was also followed by the committee during the relevant timeframe in evaluating applications and was believed by committee members to be an enforceable regulation.
   2. The “rule change” procedure in Civil Code Section 1357.100 and following was not applicable because the height guideline rule was adopted prior to the effective date of the statute, which was January 1, 2004.
   3. The architectural committee properly functioned, although there was some question as to its membership. Certain individuals acting with the committee may have not been formal members, but they may have been “pro tem” committee members.
   4. The trial court did not abuse its discretion in ordering that the house be brought into compliance with the height restriction even though expert testimony indicated that it would cost at least $200,000 to do so. The Court found that the cost and inconvenience of bringing the home into compliance was not disproportionate given their intentional conduct. California law prohibits a defendant from raising a “hardship” defense to defeat an injunction as to encroachments, if the encroaching party was willful nor negligent. Analogizing this principle to the architectural violation, the trial court and court of appeal held that the Cramers could not raise the defense that the relocation of their property would constitute a hardship, since they acted intentionally.
   5. The trial court and court of appeal also found that the injunction was warranted because of irreparable harm to the neighbors who testified that their prior unobstructed views had been blocked by the Cramer’s home, resulting not only in diminution of value, but also a substantial loss of their enjoyment. The construction of the home also resulted in a loss of privacy.

3. Wolf vs. CDS DEVCO, 185 Cal.App. 4^th 903 (2010)

   A former director brought suit to allow him to pursue a complete inspection of corporate financial records, which he had been requesting for a period of almost one year before he received notification that he would not be nominated for re-election to the corporation’s board. The director contested his removal from the board and stated that the removal should not affect his inspection rights or deprive him of standing to pursue a lawsuit as a former director.

   The trial court sustained demurs to the former director’s complaint, finding that he did not have statutory standing as a director to pursue his demands for inspection, and this ruling was sustained on appeal.

   This ruling is consistent with the appellate decision in Villa Europa Homeowners Association vs. Superior Court, which limits corporate inspection rights to seated directors and does not extend Corporations Code inspection rights of directors to former directors who may have made a request for inspection during their term of office.

4. Chapala Management Corporation v. Stanton, 186 Cal.App. 4^th 1532 (2010)

   Homeowners Thomas and Donna Stanton replaced two windows in their condominium with “Sandtone” colored windows despite disapproval of their application by the condominium association on grounds that they were not an approved color. The association sued to enforce the window color requirement. The trial court ordered the Stantons to replace the windows and to pay the association’s attorney fees in the amount of $59,122.50. The Stantons appealed on grounds that:

   1. The association had specific and adequate legal remedies under the CC&Rs and therefore an injunction was improper;
   2. The association ignored Civil Code requirements granted the defendants a hearing before the board of directors;
   3. The architectural review committee had improperly disregarded provisions of the CC&Rs as to window colors; and
   4. The architectural review committee’s actions were arbitrary, capricious or discriminatory.

   The Court of Appeal concluded that the trial court properly granted an injunction against the Stantons. It found that the association did have a remedy for noncompliance by removing the windows and assessing the owners for the cost, as provided by the CC&Rs. But the appellate court ruled that it was not the exclusive legal remedy. Therefore, the decision of the trial court to grant the injunction was found to be within its authority and not an abuse of discretion. The appellate court noted, in upholding the trial court’s decision, that the Stantons intentionally proceeded with the unauthorized window installation in the face of the architectural review committee’s rejection of their application, that the CC&Rs stated that damages at law are an inadequate remedy for nonmonetary breaches and expressly permitted the association to seek injunctive relief to remedy the violations.

   In further support of the injunction, the Court found that it was within the board’s reasonable discretion to file suit and pursue the equitable remedy of injunctive relief. Evidence showed that the architectural review committee completed a reasonable investigation concerning the dispute by meeting with the owners to discuss their window color and by comparing the “Sandtone” windows to the association’s paint standards for similarly situated windows. The evidence also indicated that the association unsuccessfully sought to resolve the matter through mediation. The appellate court gave deference to the architectural review committee’s authority under the CC&Rs to maintain the architectural and aesthetic integrity of the association.

   Importantly, the Court of Appeal made special note that if it were not reviewing the matter on appeal, but considering it as a matter of first impression, it would question the board’s judgment in resorting to expensive and time-consuming litigation generating thousands of dollars of legal fees, rather than electing to notify the owners of their violation and issue a directive that they paint or replace the windows with windows of an approved color as authorized by the CC&Rs. The Court said that it would have been reasonable for the association to remedy the noncompliance by painting the two windows and charging the owners the expense of doing so and recovering the minimum cost in an action at law.

   The Stantons argued that the association was not entitled to the injunction because it never offered them the right to a board hearing following the architectural review committee decision as required by Civil Code Section 1378(a) and (4) and (5). The Court of Appeal rejected this argument although there was no evidence that the association met the requirement. The Stantons failed to raise the issue in the trial court, and did not meet their burden to affirmatively establish that they were prejudiced by the error. Moreover, the record showed that Mr. Stanton wrote the board requesting reconsideration following the decision by the architectural review committee. The property manager advised Mr. Stanton of the date of the board’s meeting, to which he replied that he was unable to attend due to a conflict and instead would submit written questions.

   The owners challenged the requirement of the association that casement windows on the front, street-facing side of the units be brown in color, ranging from a medium to a dark brown depending on whether the windows were varnished wood, painted wood, or vinyl. The window color chosen by the Stantons was a lighter, gray-based earth-tone color, rather than the required medium to dark brown. The Stantons challenged the association’s paint color scheme as unauthorized and capricious because it was in violation of the CC&Rs which required all exterior replacement windows to be “chocolate brown” in color without regard to the location.

   The appellate court discounted this argument because the Stantons replaced the window, without architectural review committee approval and, according to their argument, the window color they were required to install would have been chocolate brown. Moreover, the appellate court found that the trial court properly concluded that the architectural review committee had discretion in granting requests for improvements on the basis of aesthetic considerations. This discretion was not wholly arbitrary because it was based on a rational relationship to the protection, preservation, operation and purpose of the affected land.

   Finally, the Court of Appeal rejected the contention of the Stantons that the trial court erred in not finding the architectural review committee to have acted in an arbitrary, capricious or discriminatory manner, even though the evidence showed that one other owner had been allowed to install “Sandtone” colored windows in the front of his unit. The Court found that the association had maintained a longstanding policy of requiring street-facing windows to be a darker brown color, but allowing owners to use lighter colors on other non-street-facing windows. Although the appellate court affirmed the judgment, it ordered the parties bear their own costs on appeal.

5. Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 187 Cal.App. 4^th 24 (2010); California Supreme Court, Case No. S186149

   This homeowners association filed a construction defect action against the developer of the condominium project for itself, and as a representative of its members, for damage to common areas, to property owned by the association, and to property owned by individual members. The Court of Appeal concluded that an arbitration provision in the declaration of covenants, conditions and restrictions recorded by the developer of the condominium project was not an “agreement” sufficient to waive the constitutional right of jury trial for construction defect claims brought by the homeowners association. The CC&Rs purported to prohibit amendment by the association without the written consent of the developer. The Court further held that the jury waiver provision in the purchase and sale agreements signed by the members of the association was not enforceable, and therefore neither the homeowners nor the association were bound by it.

   The Court noted that there was not an “agreement” to waive the jury fees because there was no express acceptance by the association, or any conduct by the association from which necessary agreement could be implied.

   This ruling followed the decision in Treo & Kettner Homeowners Ass’n. vs. Superior Court, 166 Cal.App. 4^th 1055 (2008) which held that a provision in the CC&Rs making all disputes between a developer and homeowners association subject to judicial reference under Code of Civil Procedure Section 638 was not a “written contract” as the Legislature contemplated the term in the context of Code of Civil Procedure Section 638.

   The Court suggested that a provision that allowed the association and the members to decide via an amendment to ratify a binding arbitration process would be enforceable. Alternatively, the Court suggested that a CC&R clause providing that the failure of a homeowners association to amend the CC&Rs to eliminate a binding arbitration clause would amount to an acceptance of the provision and be enforceable. The Court further held that the provision requiring the parties to bear their own costs, including expert costs, added to the substantive unconscionability of the arbitration agreement.

   The California Supreme Court has agreed to review this decision and will rule on the enforceability of arbitration clauses in covenants, conditions and restrictions.

6. Worldmark, The Club v. Wyndham Resort Development Corporation, 187 Cal.App. 4^th 1017 (2010)

   A member of a California nonprofit mutual benefit corporation who owned vacation timeshare resorts demanded a right to inspect and copy membership records, including e-mail addresses of members, for the purpose of distributing a petition to amend the bylaws. The Superior Court denied the corporation’s motion to set aside the demand, finding that the corporation’s proposed alternative was not reasonable, and ordered the corporation to allow the member to inspect and copy its membership register, including the names, addresses, e-mail addresses, telephone numbers, and the voting rights of its members. The corporation had proposed the use of a third party mail house to send the petition by conventional mail as a “reasonable alternative” to the members’ demand under Corporations Code Section 8330(b) and (c) and 8331(a). The appellate court agreed with the trial court’s finding that the request for the information was for a proper purpose, and that the alternative proposed by the corporation, which would cost One Dollar ($1.00) per member, resulted in an unreasonable cost of over Two Hundred Sixty Thousand Dollars ($260,000).

   The owner’s concerns were that:

   1. The board of directors was dominated by a certain group of executives;
   2. The corporation failed to conduct meetings at which member motions could be raised and voted upon;
   3. The absence of any independent owners on the board; and
   4. The lack of meaningful member representation in the governance of the corporation.

   The Court of Appeal ruled that the term “members’ addresses” in Corporations Code Section 8330(a)(1) that a corporation is required to disclose is sufficiently broad to encompass e-mail addresses in light of that section’s purpose and in light of related sections allowing a corporation to communicate with its members for the purpose of the corporation’s business.

   It is presently unclear whether the holding in this case will apply to homeowners associations as the right of inspection and copying of records is specifically covered in Civil Code Section 1365.2. That section refers to the “mailing address” being available for inspection. But, homeowners associations that are incorporated are nonprofit mutual benefit corporations subject to Corporations Code Section 8330. Civil Code Section 1365.2(1) states that it supersedes Section 8330 “to the extent inconsistent.” Therefore, the issue of whether e-mail addresses maintained by the association are available for owners to inspect and copy is an open question.

7. Affan vs. Portofino Cove Homeowners Association, 189 Cal.App. 4^th 930 (2010)

   The Affans owned a first floor condominium that experienced nine sewer backups in a six year span. The association acknowledged responsibility for maintenance and repair of the sewer line. When the homeowners sued the association and its management company for the cost of repair of the damaged unit, and for attorney’s fees, the association raised the defense that the board would not be liable under the doctrine of the Lamden, 21 Cal. 4^th 249 (1999). In the Lamden case the Supreme Court ruled that courts should defer to the ordinary maintenance decisions of homeowners associations when the board, upon reasonable investigation, in good faith, and with regard for the best interests of the association and its members, exercises discretion within its scope of authority to select among the means for discharging its maintenance and repair obligations. In particular, Portofino Cove Homeowners Association stated that it had reasonably chosen to periodically clean the sewer pipe in question through a “hydrojet” procedure using a high-pressure stream of water.

   The Court of Appeal rejected the Lamden defense as to the management company because the Lamden only protects homeowners association and not their management agents.

   As to the association, the Court found that the association failed to establish the factual requirements for the Lamden judicial deference because, over an extended period of time, the association ignored the sewer backup problem. Also, the association did not produce evidence that a decision had been made regarding a method of addressing the sewer backup. Rather the Court found that the evidence showed continuing indecision and inattention to the plumbing maintenance issues. The Court also found a lack of evidence that the association acted in good faith with regard to the best interests of the association and its members because no one testified about the board’s decision making process.

   Associations are therefore cautioned to investigate promptly serious maintenance and repair issues, to obtain the advice of qualified experts, and to create a clear paper trail in the form of board minutes, confirming the considered basis for the selected method of repair.

8. Harrison vs. Sierra Dawn Estates Homeowners’ Association, Inc., 2010 Cal.App Unpub. LEXIS 4736 (2010)

   An owner of multiple units challenged the validity of the rental restriction in a CC&R amendment. The amendment was upheld by the Court of Appeal. The Court noted evidence from the association’s expert witnesses that owners tend to take better care of their property, are more compliant with the rules, and are more involved in community activities and that a high rental rate affects the willingness of mortgage lenders to make loans. The association’s witnesses included two attorneys, a property manager, the city housing and code enforcement manager, the city planning director, a former city administrator, and an expert on senior citizen developments.

   While not available as a precedent, this case illustrates that care is required in the adoption of rental restrictions, and in the legal strategy to enforce those restrictions, if they are challenged.

9. Villa Europa Homeowners Association vs. Superior Court, 2010 Cal.App. Unpub. LEXIS 2926 (2010)

   This unpublished opinion concerned a member of a board of directors of a homeowners association who sued the association for water and mold damage to her condominium unit. She sought access to association records under Corporations Code Section 8334, which allows directors to have an absolute right of inspection and copying of all association books and records. The trial court allowed her such inspection, but before the court granted the petition, the board of directors voted to remove her as a board member (for failure to attend three consecutive board meetings in violation of the bylaws) and, furthermore, the association’s membership voted to recall all of the association’s board of directors, including the plaintiff. The trial court stayed the effect of the vote to remove the plaintiff as a director, and to recall all the directors, pending the production of the documents she had requested.

   The Court of Appeal found that the trial court exceeded its jurisdiction in staying the effect of the vote to recall the board of directors, and found that the recall vote rendered the plaintiff’s petition under Corporations Code Section 8334 moot, as her removal made her ineligible to review the association’s documents in her capacity as a director.

   Although this case may not be cited as precedent, it is instructive in the strategies that an association may use when a director endeavors to abuse his or her authority for personal advantage.

Jeffrey A. Barnett is an association attorney with legal offices in San Jose. He is a past member of ECHO’s Board of Directors and a current member the Legal Resource Panel, the Legislative Committee and several regional resource panels.