A. PETITION TO AMEND CC&Rs AND BYLAWS CONTAINING A “SUPERMAJORITY” REQUIREMENT AND LEASING RESTRICTIONS
1. Fourth La Costa Condominium Owners Assn. v. Seith, (2008) 159 Cal. App. 4th 563.
In 2004, the Fourth La Costa Condominium Owners Association’s (“Association”) Board of Directors desired to restate its CC&Rs and Bylaws to, among other things, bring the documents up to date with current law. The documents had been in effect since 1969 and had never been amended. Both documents required approval of 75% of the Association’s voting power (a “supermajority”) to amend. Additionally, the CC&Rs required approval of 75% of the holders of mortgages or deeds of trust (“Lenders”) to approve any amendment.
In mid-2005, the Association mailed proposed First Restated CC&Rs and Bylaws to its 48 Unit Owners asking for approval of both documents. The Association held an informational meeting and mailed two reminders to the Owners regarding the vote on the restated documents. Despite these efforts, the Association did not obtain approval of 75% of the voting power for either document. The Association did, however, obtain approval of a majority of the membership.
In early 2006, the Association mailed, via certified mail, return receipt requested, copies of the First Restated CC&Rs and a ballot to the Lenders. The letter informed the Lenders that their signature on the “green” return receipt card would be deemed their written consent, unless a ballot was returned within thirty (30) days. 75% of the Lenders had consented, or were “deemed” to have consented to the First Restated CC&Rs.
The Association filed petitions (“Petition”) under California Civil Code Section 1356 (for the CC&Rs) and Corporations Code Section 7515 (for the Bylaws) asking that the court reduce the percentage of votes necessary to approve the two documents. Barbara Seith (“Seith”), an Owner of two Units, filed objections to the Petitions. She objected to the procedures used by the Association to obtain the votes of the Owners and the Lenders. She also raised objections to many specific provisions of the documents and claimed that Civil Code Section 1356 was unconstitutional.
The trial court granted the Petitions on August 21, 2006. Seith then filed an appeal. The Appellate Court affirmed the ruling of the trial court’s decision to grant the Petitions.
Background of Civil Code Section 1356
Civil Code Section 1356 was one of the original statues included in the Davis- Stirling Common Interest Development Act when it became effective in 1985. It has never been amended. The statute provides a tool for assisting associations in amending their CC&Rs. Pursuant to this statute, associations or owners can file a “petition” asking the Superior Court to reduce the percentage of affirmative votes required to amend the CC&Rs when the document requires that more than a majority of the voting power (a “supermajority” ) must approve the amendment. Under the statute, the petitioner must provide the court with documentation regarding the amendment procedure and voting results. Once the petitioner provides the court with the required information, and after notice of the hearing to the owners, the Superior Court judge, in his or her discretion, may grant the petition. Granting the petition effectively reduces the “supermajority” approval percentage required by the CC&Rs to amend.
Important Rulings of This Case
(a) Burden of Proof at Trial/Appellate Court Levels
The Court determined that since proposed amendments to CC&Rs do not have the presumption of reasonableness that recorded CC&R provisions have under Civil Code Section 1354, the party bringing the petition under Section 1356 has the burden of proving that the proposed amendment is “reasonable.” The Court set forth the “reasonableness” test as follows:
A CC&R is unreasonable if it is arbitrary and capricious, violates the law or a fundamental public policy or imposes an undue burden on property, and it is reasonable unless it meets those criteria.
The Court further determined that the standard of review on appeal of a trial court order regarding a proceeding brought under Section 1356 is “abuse of discretion.” Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason, all of the circumstances before it being considered. Denham v. Superior Court (1970) 2 Cal. 3d 557, 566.
(b) Method of Obtaining Lender Consent
Seith objected to the “deemed consent” method used by the Association to obtain consent of the Lenders. The trial court had determined that since the CC&Rs distinguished between requiring an “affirmative vote” of the Owners and “written consent” of the Lenders, the document contemplated a distinction between the forms of approval required from each group, with the approval from the Lenders being more relaxed in form. The Appellate Court agreed with the trial court’s assessment that the Association’s method of assuring receipt of the proposed changes by the Lenders and thereafter providing them with 30 days within which to reject the changes was “as good as any.”
The Court’s ruling is important because many CC&Rs require consent of Lenders in various circumstances. This opinion, which affirms the reasonableness of the procedures used to obtain consent where the documents are silent, clarifies this issue for many other associations whose documents may be silent as to the method by which consent of the Lenders can be obtained.
(c) Amending the Amendment Provision
Perhaps one of the more significant rulings of this case is the issue of whether an association can amend its documents to require less than a specific percentage to approve, when the amendment provision, by its express terms, states that it cannot be amended. The Association’s 1969 CC&Rs provided that it could be amended upon approval of 75% of the Owners and that the amendment provision could not be amended to allow for approval by less than 75% of the Owners. The First Restated CC&Rs changed this amendment provision to require approval of a majority of the voting power. Seith contended the trial court exceeded the authority of Section 1356(d), by granting the Petition.
The Court of Appeal recognized this as an issue of contract interpretation and that the language of the current CC&Rs would be upheld if it is clear and “does not involve an absurdity.” The Court, relying on the arguments raised by the Association at the trial court level, concluded that a provision restricting an association’s ability to amend the document in perpetuity was “absurd.”
(d) “For Sale/For Lease” Signs are Commercial Signs
Seith objected to the language in the First Restated CC&Rs concerning signs. The provision states that no “commercial” signs can be posted in the Association except for one “For Sale” or “For Rent” sign per Unit. The provision further sets forth additional restrictions on the posting of these signs, such as placing them in windows, requiring the signs to be professionally made and removed within three (3) days of the close of escrow.
Seith contended that the provision violated Civil Code Section 1353.6 which limits an association’s restrictions on “non-commercial” signs. She argued that sale and lease signs are “non-commercial” because Owners are not engaged in buying or selling property and are therefore, not engaged in commerce. The Court of Appeal rejected this argument and recognized that other cases have determined that signs advertising a property for sale constitute commercial speech which are not subject to the protections of Civil Code Section 1353.6.
(e) The Association Made A Reasonably Diligent Effort to Solicit Ballots The Court also addressed whether the procedures used by the Association to obtain votes met the requirement of making a “reasonably diligent effort . . . to permit all eligible members to vote on the proposed amendment” as required by Civil Code Section 1356(c)(3). The Court recognized that while the Association could have made phone calls to the 12 Owners who did not vote, it concluded that the Association’s efforts (including a town hall meeting, two reminders by letter and a reminder in the newsletter) were sufficient to satisfy the “reasonably diligent” standard set forth in Section 1356.
(f) Procedure to Reduce “Supermajority” in Bylaws Since Civil Code Section 1356 only applies to CC&Rs, Corporations Code Section 7515 has been used by associations to reduce the “supermajority”approval requirements for amendments to Bylaws. Here, the Court set forth that Corporations Code Section 7515 can be used retroactively to approve amendments to Bylaws. The Court recognized that similar to Civil Code Section 1356, the Corporations Code section is intended to allow an association to overcome voter apathy.
This case is important because it sets forth new rules of law concerning the ability of associations to amend their governing documents. Additionally, the holding regarding obtaining consent of the Lenders is important as the “deemed consent” process is frequently used in situations where the amendment provisions or lender protection provisions in an association’s governing documents are silent regarding how to obtain Lender consent.
2. Mission Shores Assn. v. Pheil, (2008) 166 Cal. App. 4th 789.
The reasonableness of lease restrictions contained in a CC&Rs amendment was the issue before the court in this case.
The CC&Rs of the Mission Shores Association (“Association”) did not contain any language regarding a minimum amount of time a Lot could be leased. The Board of Directors proposed an amendment to the CC&Rs to add lease restrictions, including that Lots needed to be leased for a minimum of 30 days and that the Association would have the ability to evict tenants if the tenants breached the governing documents.
The CC&Rs required the affirmative vote of sixty-seven percent (67%) of each “class” of members to approve the amendment. While the Association obtained 100% of the Class B votes (the Declarant class), it only obtained approval of 59% of the “owner” class. 36 out of the 157 Owners did not submit ballots.
The Association petitioned the Superior Court, pursuant to Civil Code Section 1356, seeking a reduction of the “supermajority” requirement for the amendment. David Pheil, one of the Owners within the Association, filed an objection to the petition. He objected to the requirement that leases for Lots needed to be for a minimum of thirty (30) days. The Association’s reason for the minimum lease term was to prevent use of any Lot as a hotel. The Association provided a declaration from its counsel regarding the prevalence of CC&R restrictions containing a 30-day minimum lease provision. Mr. Pheil also claimed that the petition should not be granted because a majority of the Board deciding to bring the petition was comprised of Declarant representatives, the Association failed to mail notice of the election results as required by Civil Code Section 1363.03(g) and the amendment needed to be approved by the holders of mortgages. The Superior Court, noting the prevalence of CC&R provisions with a 30-day minimum lease requirement, granted the petition. Mr. Pheil appealed.
The questions on appeal were:
(1) Was the amendment was reasonable?;
(2) Did the balloting conform to the CC&Rs ?; and
(3) Were the security interest of mortgagees impaired?
The Appellate Court applied the standard of review from Fourth La Costa Condominium Owners Assn. v. Seith, (2008) 159 Cal. App. 4th 563 (discussed above) and determined that the Association had the burden of proving the reasonableness of the proposed amendment. Applying the reasonableness test, the Appellate Court determined the thirty (30) day minimum provision was reasonable:
On the record before this court, we cannot find that the imposition of a 30-day minimum lease term is unreasonable. The provision applies to all owners who rent their Homes, the restriction does not violate public policy (see, e.g., City of Oceanside v. McKenna (1989) 215 Cal. App. 3d 1420, 1426-1427 [restrictions requiring owner occupancy and forbidding the leasing of units were reasonable in view of the city’s redevelopment goals of providing a stabilized community of owneroccupied units for low and moderate income persons]), and any burden to enforce the minimum lease term is outweighed by its beneficial value in preserving the residential character of the development.
The court further upheld the reasonableness of the provision which assigned the Association the ability to evict tenants for breaches of the CC&Rs. The court agreed with the Association’s argument that since homeowner associations have been analogized to landlords for purposes of determining tort liability (Frances T. v. Village Green Owners Assn. (1986) 42 Cal. 3d 490), they should equally benefit from any rights attributed to a landlord. The court further recognized the need for an association to ensure compliance with the governing documents by a tenant, if the owner fails or refuses to take corrective measures. The court determined the eviction provision does not violate public policy.
Pheil claimed that the petition was improperly granted because the Association failed to provide its owners with notice of the results of the vote on the amendment within fifteen (15) days as required by Civil Code Section 1363.03(g). The Appellate Court found this failure to be “trivial” which did not preclude granting the petition.
Pheil argued, without any evidentiary support, that the trial court was not able to grant the petition because the proposed amendment affects the rights or protection granted to mortgagees and could result in a mortgage being canceled by forfeiture. The Appellate Court rejected this argument noting that Section 1356(e)(3) forbids the court from approving any amendment to CC&Rs that impairs the security interest of a mortgagee, if approval of a specified percentage of the mortgagees is required under the CC&Rs. Here, the CC&Rs did require the holders of 51% of first mortgages to approve certain amendments, none of which involved the leasing restrictions contained in the amendment which was the subject of the petition.
This decision is important because it upholds the reasonableness of CC&R provisions that require leases to be for a minimum period of time. It further upholds the ability of associations to evict problem tenants.
B. FIVE YEAR STATUTE OF LIMITATIONS APPLIES TO ACTIONS FOR VIOLATION OF RESTRICTIONS
– Pacific Hills Homeowners Assn v. Prun, (2008) 160 Cal. App. 4th 1557.
This case addresses many issues common to enforcement of restrictions within homeowners associations. In late 2000, defendants built a gate on a Lot within the Pacific Hills Homeowners Association (“Association”) without first obtaining architectural approval from the Association. The gate was built in violation of certain setback requirements in the Association’s unrecorded architectural guidelines. The Association ultimately denied defendant’s late submitted plans for the gate, due to the setback issues. Although the Association took steps to enforce defendant’s violation of the architectural guidelines over the next few years, there were significant periods of inactivity. The Association filed its lawsuit in April 2005.
One of the issues of the case was whether the 5-year statute of limitations contained in Code of Civil Procedure (“CCP”) Section 336 applied. CCP Section 336 provides that an action for violation of restrictions must be brought within 5 years. Civil Code Section 784 defines the type of “restrictions” to which CCP 336 refers. Defendants argued that because the Association sought to enforce an “unrecorded” restriction, the statute did not apply. The Appellate Court rejected this argument, noting that CCP Section 336 was not limited to “recorded” restrictions.
The defendants also argued the Association had “waived” its right to enforce the guidelines. Defendants claimed there was selective enforcement because another owner near the defendant had built pilasters in violation of the setback contained in the architectural guidelines and the Association had not enforced the guidelines against that owner. The court determined there was no selective enforcement for a variety of reasons:
(1) The Association was unaware of the pilaster violation until the defendants pointed it out during the pendency of the dispute;
(2) The Association determined that the neighbor’s improvements were not as obtrusive as defendant’s, constituted only a minor obstruction and therefore, not as dangerous as compared to the defendant’s gate, which was a safety hazard. The court found that the Association took into account the relative safety of the two different structures, thus evaluating them in light of the entire development in deciding to proceed.
The Court of Appeal upheld the Association’s decision not to file suit over the neighbor’s pilaster violation, thus did not engage in selective enforcement. The defendants also argued that the Association’s claims were barred under the defense of “laches.” Laches is an equitable defense which provides that an unreasonable delay in enforcing the act complained about has caused prejudice to the violating party.
The Court determined that while there was no question the Association delayed in enforcing the setback provision, the defendants had not shown the prejudice to them caused by the delay. One significant factor was that defendants completed the gate without obtaining the appropriate permission so the Association’s delay would have had no impact on defendants’ completion of the project. As a warning to other associations, the court stated:
We do not condone this course of conduct and in the right fact situation, which we do not define, such delays could support a finding of laches.
This case is important because it sets forth that the statute of limitations for filing actions to enforce “restrictions” (i.e., provisions contained within an association’s governing documents) is five years, and that the restrictions do not need to be contained in a recorded document (i.e., may be contained in the architectural guidelines). Generally, a four-year statute of limitations applies to actions involving an association’s Declaration of CC&Rs, Bylaws or other governing documents under the applicable CCP section governing written contracts. Please note, however, that while the five-year statute of limitations for the Association to file its lawsuit was upheld, the court made it clear that such a delay may prejudice the association’s ability to raise a claim in other circumstances.
Additionally, this case is important because it upholds an association’s decision not to enforce a restriction where the association can provide a reasonable basis for its determination.
C. BOARD DECISION TO ALLOW OWNERS TO USE A PORTION OF COMMON AREA
– Harvey v. The Landing Homeowners Assn., (2008) 162 Cal. App. 4th 809.
This case examined the decision of a Board of Directors to allow some of the owners in a condominium complex to use a portion of common area for their exclusive use. In The Landing Homeowners Association (“Association”), the fourth floor contained common area attic space that was only accessible by each of the fourth floor Unit Owners and provided no benefit to other Association members. The fourth floor Owners had been using the attic space for a number of years, for various purposes. One Owner had converted the space to living area. After another Owner complained about the use of this space, the Board inspected the Units. The Board also consulted with legal counsel, the City and its insurance company regarding the Owners’ use of the attic space.
The Association’s CC&Rs provided that the Board had the right to allow Unit Owners to exclusively use a “nominal” portion of the otherwise nonexclusive common area. Based on its investigation and consultation, the Board concluded that it would allow the fourth floor Unit Owners to use 120 square feet of the attic area for rough storage only. The Board then took steps to have the fourth floor Unit Owners comply by requiring them to return the attic space to its original condition, purchase insurance and sign a permission form authorizing the use of the space under the stated conditions. Several of the Board members owned Units on the fourth floor.
One of the homeowners filed suit against the Association claiming trespass, breach of fiduciary duty and injunctive relief. The trial court applied the “business judgment rule” set forth in the California Supreme Court case of Lamden v. La Jolla Shores Clubdominion Homeowners Assn. (1999) 21 Cal. 4th 249:
Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions . . . courts should defer to the board’s authority and presumed expertise.
The trial court granted the Association’s motion for summary judgment, finding that the Board acted within the scope of the authority granted to it under the CC&Rs to allow owners to use a “nominal” portion of the common area attic space. The homeowner appealed.
On appeal, the homeowner argued that the trial court erred in applying the Lamden business judgment standard instead of the test for reasonableness of a CC&R provision set forth in Narhstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal. 4th 361. The Appellate Court rejected this argument. Since the CC&R provision allowed the Board to exercise discretion in determining under what circumstances it could allow an owner to exclusively use a portion of the common area, the Lamden standard was the correct application. The restriction in the Nahrstedt case did not allow the Board to exercise any discretion.
The Appellate Court, applying the Lamden standard, found that the Board had conducted a reasonable investigation, acted in good faith and with regard for the best interests of the community and found their decision was within the business judgment rule.
This decision is important because it clarifies under what situations the Lamden business judgment rule for Board decision-making and the Narhstedt reasonableness test for CC&Rs provisions will be applied.
D. DEVELOPER WRITTEN WAIVER IN CC&RS DEEMED VOID
– Treo @ Kettner Homeowners Assn. v. Sup. Ct., (2008) 166 Cal. App. 4th 1055.
The issue in this case was whether a provision in the developer-written CC&Rs could effectively waive the association’s and owners’ rights to a jury trial in actions against the developer.
The Treo @ Kettner Association (“Association”) sued the developer of the condominium project for alleged construction defects. A provision in the Association’s CC&Rs required that all disputes between it and the developer be decided by general judicial reference under California Code of Civil Procedure (“CCP”) Section 638. The developer moved for an order submitting the case to a judicial referee. The Association opposed the order arguing that the CC&Rs were not a “contract” as required by CCP Section 638 and that if it was, it was unconscionable and unenforceable. The trial court granted the developer’s motion and ordered the matter to a general judicial reference. The Association petitioned the Court of Appeal asking it to direct the trial court to set aside its order.
CCP Section 638 provides that where a “written contract” provides, a referee may be appointed to decide the dispute. The primary effect of such a judicial reference is to require trial by a referee and not by a court or jury.
The Appellate Court examined case law regarding jury waivers resulting from prelitigation contracts that agree to general judicial references under CCP Section 638. The court relied on the case of Grafton Partners v. Sup. Ct. (2005) 36 Cal. 4th 944 where the California Supreme Court noted that the California constitution provides that trial by jury is an “inviolate right” that in civil cases may be waived by the consent of the parties expressed as prescribed by statute. In Grafton, the court held that the rules under which parties to a lawsuit may waive jury trial must be set forth by statute and power may not be delegated to courts. Because the right to trial by a jury is considered fundamental, ambiguity in statutes permitting such waivers must be resolved in favor of allowing a jury trial.
The issue before the Court was whether the reference in CCP Section 638 to a “written contract” includes equitable servitudes created by the CC&Rs of common interest developments. The Court concluded that it believed the Legislature did not intend that provisions in CC&Rs be considered a “written contract” within the meaning of CCP Section 638. Of importance, the Court noted that later purchasers and successors have no choice but to accept the CC&Rs prepared by the developer, including judicial reference provisions waiving the right to trial by jury. The Court stated:
Treating CC&Rs as a contract such that they are sufficient to waive the right to a trial by jury does not comport with the importance of the right waived. CC&Rs are notoriously lengthy, are adhesive in nature, are written by developers perhaps years before many owners buy, and often, as here with regard to the waiver of trial by jury, cannot be modified by the association. Further, the document is not signed by the parties.
The Court concluded that a developer-written provision in CC&Rs which requires owners and/or the Association to waive their right to a jury trial is not a “written contract” as the Legislature contemplated in the context of CCP Section 638. The court further relied upon the analysis in Grafton that because the right to a jury trial is anchored in the Constitution, the circumstances and manner of its waiver are serious matters requiring actual notice and meaningful reflection. The Court held that the trial court’s ruling granting the motion for general reference should be vacated and an order denying the motion should be entered.
This case is important because it sets forth that homeowners associations and their owners will not be bound by a provision in the CC&Rs requiring disputes between the owners and the association and the developer be submitted to general judicial reference, thereby waiving the parties’ rights to a trial by jury. It is important to understand that if purchasers of units within a development have a separate contract with the developer which contains this jury trial waiver, that provision may be upheld.
E. TRANSFER OF PARKING SPACES IN CONDOMINIUM CONVERSION
– Crestmar Owners Assn. v. Stapakis, (2007) 157 Cal. App. 4th 1223.
The issue in this case was whether a suit brought to set aside an illegal transfer of parking spaces in a condominium conversion was timely filed.
In 1977 a developer converted a building in Long Beach into condominiums. Crestmar Owners Association (“Association”) was created to manage the common areas. The CC&Rs obligated the developer to transfer parking spaces in the building’s garage to Owners who bought condominiums. The CC&Rs further provided that all remaining parking spaces would be conveyed by the developer to the Association within three years of the first Unit being sold. Under this provision, the developer should have transferred the last of any remaining parking spaces to the Association no later than the early 1980s. The developer never deeded the building’s last two parking spaces to the Association.
In October 2004, the developer conveyed to its president and sole shareholder, William Stapakis, the two parking spaces it had not transferred to the Association. Stapakis demanded the Association let him use the spaces for his personal use. He also demanded the Association pay him a quarter century’s worth of back rent for the Association’s use of the two spaces since the early 1980s.
In January 2005, the Association filed a lawsuit against the developer and Stapakis seeking to have the deeds to the Stapakis parking spaces canceled and the spaces conveyed to the Association. Stapakis filed a motion for summary judgment claiming that the Association’s complaint was untimely. He claimed that the Association should have filed a lawsuit within four years of the early 1980s. The trial court disagreed and conducted a one-day trial and entered judgment for the Association, canceling the deed of the parking spaces to Stapakis and ordering that the parking spaces be deeded to the Association. Stapakis appealed.
The Appellate Court reviewed the issue of the statue of limitations. The issue was not how long the statute of limitations was for breach of a written contract (four years under CCP Section 337) but, rather, when the statute began to run (i.e, “accrued”). The Association argued that the statute accrued when it demanded the developer cancel the Stapakis deeds which occurred in 2005. The appellate court determined that the Association’s complaint was timely because the statute of limitations for an action to quiet title does not begin to run until someone presses an adverse claim against the person holding the property. The court concluded that the Association’s lawsuit was timely filed since its claim for quiet title did not arise until it demanded the developer cancel the Stapakis deeds and deed the spaces to the Association.
This case is important because it is not uncommon in condominium conversions to have issues over parking space conveyances. It is important for associations to understand the requirements of its governing documents regarding the developer’s obligation to convey parking spaces to the association and to ensure that the parking spaces are timely conveyed.
F. ASSOCIATION FOUND NEGLIGENT AND IN BREACH OF THE CC&Rs
– Ritter & Ritter, Inc. v. The Churchill Condominium Assn., (2008) 166 Cal. App. 4th 103.
In this case, a jury found the Association liable for failure to fireproof slab penetrations in a 44-year old condominium building. When the building was constructed, holes in the concrete were formed for the purpose of running the various pipes and plumbing serving the units. Although the original building plans called for these slab penetrations to be “fireproofed,” this was never done. The building code at the time did not require fireproofing the slab penetrations.
The Ritters purchased two units in the Association in 1998. During a remodel of one of the units in 1999, it was discovered that the slab penetrations were open. In 2003, in response to complaints about odors, the Board conducted hired experts to conduct an investigation. The Board concluded that the Ritters should have filled the slab penetrations in 1999 due to building codes existing at that time. The Association sought enforcement action against the Ritters when they refused to fill the slab penetrations. The Ritters claimed that the Association was responsible to fireproof the slab penetrations in their units and all the units in the building.
In 2004, the Ritters filed a lawsuit against the Association and the individual Board members, claiming, among other items, negligence, breach of fiduciary duty, breach of the CC&Rs and injunctive relief to have the Association fill all the slab penetrations in the building. At trial, the jury and judge found the Association liable and awarded plaintiff’s attorneys fees of over $500,000.00. The individual Board members were not found to be in breach of their fiduciary duties.
On appeal, the Association challenged the findings of the judge and jury that the Association was in breach of its duties, especially since the determination was made that the individual Board members did not breach their fiduciary duties. The Appellate Court discussed the duties of Board members and the Association under the “business judgment rule” set forth in Lamden v. La Jolla Shores Clubdominion Homeowners Assn., (1999) 21 Cal. 4th 249. Interestingly, in this decision, the Appellate Court held that the Lamden standard for judicial deference is only restricted to “ordinary” decisions for repair and maintenance actions that are clearly within the Board’s discretion under the governing documents. According to this Court, the Lamden decision gives no direction as to what standard courts should apply to a challenge to a Board involving an extraordinary situation, such as major damage from an earthquake.
The Appellate Court also rejected the Association’s claims that since the Directors were held not liable, finding that the Association was liable was inconsistent. The Court concluded that the liability of the Association is “separate and distinct” from the liability of the individual directors and it is “legally possible” to have one without the other. The Appellate Court further explained that the Lamden “judicial deference” rule provides protection from personal liability for the individual directors, but that the same rule of judicial deference does not automatically provide protection for the corporate entity.
Regarding the attorneys’ fees award, the Association argued that plaintiffs were not the “prevailing party” because the individual Directors were not found liable. The Appellate Court rejected this argument and stated the Board members did not win, they “merely avoided liability.”
This case is important because it sets forth a distinction in judging the liability of associations as corporate entities and the individual directors for the same decision made. Under this case, even if the individual directors are held to be not liable for a decision, a finding that the corporation is liable is not inconsistent. This case also leaves open the question of what standard will be applied to decisions of directors made in extraordinary situations.