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Cobb v. Ironwood Country Club

(2015) 233 Cal.App.4th 960

[ADR; Bylaws Amendment] An amendment to the Bylaws by the HOA incorporating an arbitration provision does not bind ongoing disputes and accrued claims.

Green, Bryant & French, Matthew T. Poelstra; Boudreau Williams and Jon R. Williams for Defendant and Appellant.
Robert L. Bouchier for California State Club Association as Amicus Curiae on behalf of Defendant and Appellant.
Slovak Baron Empey Murphy & Pinkney, Thomas S. Slovak and mCharles L. Gallagher for Plaintiffs and Respondents.
Arbogast and Bowen and David M. Arbogast for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

OPINION

RYLAARSDAM, J.

—Ironwood Country Club (Ironwood or the Club) appeals from an order denying its motion to compel arbitration of the declaratory relief action brought by plaintiffs William S. Cobb, Jr., and Elizabeth Richards, who are former members of Ironwood, and Patrick J. Keeley and Helen Riedstra, who are current members. The motion to compel was based on an arbitration provision Ironwood incorporated into its bylawsfour months after plaintiffs’ complaint was filed. Ironwood argues (1) that its new arbitration provision was fully applicable to this previously filed lawsuit because the lawsuit concerned a dispute which was “ongoing” between the parties, and (2) that its right to amend its bylaws meant that any such amendment would be binding on both current and former members.

The trial court disagreed, reasoning that Ironwood’s subsequent amendment of its bylaws was insufficient to demonstrate that any of these plaintiffs agreed to arbitratethis dispute, and that if Ironwood’s basic premise were [963] accepted, it would render the agreement illusory. We agree with both conclusions and affirm the order.

When one party to a contract retains the unilateral right to amend the agreement governing the parties’ relationship, its exercise of that right is constrained by the covenant of good faith and fair dealing which precludes amendments that operate retroactively to impair accrued rights. Plaintiffs certainly did not agree to any such illegal impairment in this case.

And Ironwood’s basic premise, which is that each member’s agreement to the bylaw provision allowing for future amendments to its bylaws means those members are automatically bound by whatever amendments the Club makes in accordance with that provision—even after the members have resigned their membership—would doom the agreement as illusory if it were correct. Fortunately, it is not.

FACTS

Plaintiffs’ complaint, filed in August 2012, alleges that two of the plaintiffs are current members of Ironwood, and two are former members. In 1999, the Club entered into an agreement with each of its 588 members, whereby each member loaned the club $25,500 to fund the Club’s purchase of additional land. The members were given the option of paying the funds in a lump sum or by making payments over a period of 20 years into a “Land Purchase Account.” In connection with the loans, the Club represented that if any member sold his or her membership before the loan was repaid, the Club would be “absolutely obligated to pay the Selling Member the entire amount then standing in the Member’s Land Purchase Account.” Moreover, any new member would be required to pay, in addition to the regular initiation fee, an amount equal to the hypothetical balance in a Land Purchase Account, as well as the “remaining unamortized portion of the Land Purchase Assessment.” (Italics omitted.)

In reliance on the Club’s representations, the members voted to approve the land purchase and enter into the loan agreements. Three of the plaintiffs paid the lump sum, and one plaintiff elected to make monthly payments into a Land Purchase Account. The Club consistently reported these payments in financial disclosures as a liability owed to each member, payable upon “sale of a member’s certificate” to a new member. (Italics omitted.) In April 2012, Ironwood represented that it had repaid the $25,500 land purchase assessment to 10 resigned members whose memberships were subsequently purchased by new members, since 2003.

However, plaintiffs alleged that despite the Club’s initial description of how the funds would be generated to reimburse resigning members, it [964] “inexplicably failed” to require new members to pay the equivalent of the land purchase assessment when they joined.

More significantly, in January 2012, Ironwood announced that “[a]fter substantial due diligence, [it had] concluded that the practice of repaying the Land Assessment to forfeiting members . . . must cease effective immediately.” (Italics omitted.) Thereafter, Ironwood made various conflicting and confusing statements and unilaterally imposed new rules to justify writing off its previously acknowledged liability to the members.

Based on those described facts, plaintiffs alleged that an actual controversy has arisen between themselves and Ironwood, with respect to the Club’s obligation to repay the land purchase assessment to each plaintiff.

When plaintiffs filed their complaint, Ironwood’s bylaws contained no arbitration provision. However, four months later, in December 2012, the Club’s board of directors notified the membership that it was contemplating amendments to the bylaws, including the adoption of a bylaw mandating arbitration of “any claim, grievance, demand, cause of action, or dispute of any kind whatsoever . . . of or by a Member past or present . . . arising out of, in connection with, or in relation to Club Membership, Club property, Club financial obligations of whatever nature, Club equipment, and/or Club and/or Member’s activity, and involving the Club and/or the Club’s officers, directors or agents.” When it did not receive a sufficient number of objections from members in response to these proposed amendments, Ironwood’s board adopted the arbitration provision into its bylaws effective December 28, 2012.

In January 2013, Ironwood filed a motion to compel plaintiffs to arbitrate their claim against it, based on Ironwood’s “recent bylaw amendment.” The Club asserted, without analysis, that because plaintiffs each agreed to abide by its bylaws when they became members, including a provision which allowed those bylaws to be amended, they were automatically deemed to have “accepted and agreed to” the arbitration amendment subsequently adopted. Plaintiffs opposed the motion, arguing (1) Ironwood’s amendment of its bylaws did not comply with either legal requirements for corporate voting or the bylaw’s own requirements, (2) Ironwood’s amendment of its bylaws did not establish their agreement to arbitrate this dispute, (3) the provision was unconscionable, and (4) Ironwood had waived any right to arbitrate by using the court process to litigate plaintiff’s claim.

The trial court denied the motion to compel arbitration, concluding that Ironwood’s motion represented an improper effort to apply its new arbitration bylaw retroactively to a pending case. The court reasoned that Ironwood’s subsequent amendment of its bylaws did not reflect any agreement by these [965] plaintiffs to arbitrate this already pending dispute. And because arbitration is a matter of agreement, no party can be compelled to a dispute he has not agreed to submit. The court also pointed out that “[t]aken to its logical extreme, [Ironwood’s] argument would allow for an ever shifting playing field. Indeed, [Ironwood] could arguably amend and require arbitration years into a lawsuit, or amend to make conduct that was wrongful when an action was filed allowable.”

DISCUSSION

On appeal, Ironwood makes three points. Its primary contention is that by accepting membership in the Club, plaintiffs agreed to be bound by its bylaws—including the provision for future amendments—and thus they “[n]ecessarily [a]greed” to its subsequent bylaw amendment requiring arbitration of disputes. Ironwood also disputes the idea that its application of the arbitration provision to this dispute qualifies as “retroactive,” because in Ironwood’s view, the dispute is “ongoing.” And third, it claims the trial court’s ruling contravenes the public policy which requires that any doubt as to whether an arbitration agreement governs a particular dispute must be resolved in favor of ordering arbitration. None of these points has merit.

1. Ironwood’s Power to Amend

Ironwood asserts that its bylaws constitute a contract between the Club and each of its members. (See King v. Larsen Realty, Inc. (1981) 121 Cal.App.3d 349, 357 [175 Cal.Rptr. 226].) We agree. However, the Club further contends that because the bylaws include a provision allowing it to amend them, the members—even formermembers—are deemed to have agreed to whatever amendments are made in accordance with that provision. We cannot agree with that further contention.

(1) Indeed, the contract Ironwood describes would qualify as illusory, and be unenforceable. “[W]hen a party to a contract retains the unfettered right to terminate or modify the agreement, the contract is deemed to be illusory.” (Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 15 [96 Cal.Rptr.2d 179, 999 P.2d 71].) On the other hand, while “an unqualified right to modify or terminate the contract is not enforceable[,] the fact that one party reserves the implied power to terminate or modify a unilateral contract is not fatal to its enforcement, if the exercise of the power is subject to limitations, such as fairness and reasonable notice.” (Id. at p. 16.)

And under California law, one very significant restriction on what might otherwise be a party’s unfettered power to amend or terminate the agreement governing the parties’ relationship is the implied covenant of good faith and [966] fair dealing. (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885 [123 Cal.Rptr.3d 736].) The covenant operates “`as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.'” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1032 [14 Cal.Rptr.2d 335].) “The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372 [6 Cal.Rptr.2d 467, 826 P.2d 710].)

(2) With respect to arbitration provisions specifically, this court has already held that the implied covenant of good faith and fair dealing prohibits a party from “mak[ing] unilateral changes to an arbitration agreement that apply retroactively to `accrued or known’ claims because doing so would unreasonably interfere with the [opposing party’s] expectations regarding how the agreement applied to those claims.” (Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 61 [159 Cal.Rptr.3d 444].) In reaching this conclusion, we join other courts. (See Peng v. First Republic Bank (2013) 219 Cal.App.4th 1462, 1474 [162 Cal.Rptr.3d 545] [“The implied covenant also prevents an employer from modifying an arbitration agreement once a claim has accrued or become known to it.”]; Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal.App.4th 1425, 1465 [140 Cal.Rptr.3d 38] [“A unilateral modification provision that is silent as to whether contract changes apply to claims, accrued or known, is impliedly restricted by the covenant so that changes do not apply to such claims.”].)

(3) Thus, to the extent Ironwood intended to enact an arbitration bylaw that would govern this dispute—a dispute which had not only accrued, but was already being litigated in court by the time the arbitration bylaw became effective—it violated the covenant of good faith and fair dealing implied into the bylaws, and thus exceeded the proper scope of its amendment power. Consequently, there is no basis to infer that plaintiffs agreed in advance to be bound by such an attempt.

2. Retroactivity

Even if it were otherwise theoretically proper for a party to unilaterally impose an arbitration provision that applied to claims which had already accrued, there is an additional problem with Ironwood’s claim that its bylaw amendment reflected an agreement to arbitrate this dispute: i.e., there is nothing in the language of either the bylaws generally, or this specific [967] amendment, that states it is intended to have such a retroactive effect. (Cf. Peleg v. Neiman Marcus Group, Inc., supra, 204 Cal.App.4th at pp. 1432-1433 [in which the disputed provision actually stated it would apply to all unfiled claims, even those that had already accrued].)

The Club addresses this additional problem by denying that application of this arbitration provision to the instant case would qualify as retroactive. In the Club’s view, because plaintiffs have alleged their claim for declaratory relief reflects an “ongoing” dispute concerning the parties’ rights, duties and obligations under the loan agreements, it is distinguishable from the type of dispute that is “based upon some incident which occurred at some finite period of time in the past.” This distinction is specious.

All pending lawsuits—even those which are based on a specific past incident—reflect ongoing disputes. That is the very nature of a lawsuit. Until a lawsuit is resolved by settlement or judgment, or becomes moot, it necessarily reflects an ongoing dispute. Application of the arbitration bylaw to this case would qualify as retroactive because it would affect plaintiffs’ already accrued legal claims, as well as their already accrued rights to seek redress for those claims in court. (See Buttram v. Owens-Corning Fiberglas Corp. (1997) 16 Cal.4th 520, 528-529 [66 Cal.Rptr.2d 438, 941 P.2d 71] [proposition applies retroactively if it affects causes of action that accrued prior to its effective date].)

The Club also points out that even if this court were to construe this declaratory relief action as what it chooses to call a “pre-agreement dispute,” “the law does not otherwise forbid the arbitration of such a dispute.” We might agree with that point, as far as it goes, but the problem for Ironwood is that it doesn’t go very far. Coon v. Nicola (1993) 17 Cal.App.4th 1225 [21 Cal.Rptr.2d 846] (Coon), the case the Club relies on, provides no support for retroactive application of an arbitration provision in the context of this case.

In Coon, the plaintiff was treated by the defendant physician for injuries suffered in a mining accident. Several days later, the plaintiff visited the doctor in his office and signed an arbitration agreement. The agreement provided for arbitration of all claims arising out of “prospective care,” but also included an optional provision governing “`[r]etroactive [e]ffect.'” (Coon, supra, 17 Cal.App.4th at p. 1230.) That provision stated: “`If patient intends this agreement to cover services rendered before the date it is signed (for example, emergency treatment) patient should initial below: Effective as of date of first medical services.'” (Ibid.) The Coon court noted “[i]t is not disputed that respondent signed the agreement and separately initialed the clause expressly agreeing to arbitrate disputes stemming from the care appellant rendered prior to the office visit.” (Ibid., italics added.)

[968] Thus, Coon provides no authority for enforcing a unilaterally imposed retroactive arbitration agreement on a party who has not expressly consented to that retroactive application—which is what Ironwood is attempting to do here. Consequently, it offers no support for Ironwood’s position. Moreover, in the course of rejecting plaintiff’s contention that the retroactive agreement would be unenforceable even though he had expressly agreed to it, the Coon court makes a point that affirmatively harms Ironwood’s effort to enforce its new bylaw here: The court states that “[m]ost significantly, the present case does not limit appellant’s liability in any way but merely provides for a different forum in which to settle disputes.” (Coon, supra, 17 Cal.App.4th at p. 1237, italics added.) On this point as well, the Coon case is distinguishable from ours. The bylaw at issue before us, which Ironwood is attempting to apply retroactively, also purports to limit Ironwood’s liability, in that it additionally mandates a “waive[r of] all claims, rights and demands for punitive and consequential damages.” Coon provides no support for retroactive application of such a provision.

3. Public Policy

(4) Ironwood also relies on the strong public policy favoring arbitration provisions as the basis for asserting that any “`[d]oubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration.'” (Vianna v. Doctors’ Management Co. (1994) 27 Cal.App.4th 1186, 1189 [33 Cal.Rptr.2d 188].) However, that presumption is of no assistance to Ironwood here, because it is also true that “[a]rbitration is consensual in nature” (County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237, 244 [54 Cal.Rptr.2d 628]) and “`[t]he right to arbitration depends on a contract'” between the parties (id. at p. 245). Thus, “`the policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate.'” (Victoria v. Superior Court (1985) 40 Cal.3d 734, 739 [222 Cal.Rptr. 1, 710 P.2d 833].)

And as we have already pointed out, Ironwood’s unilateral amendment of its bylaws, to add an arbitration requirement that purports to retroactively compel plaintiffs to arbitrate a dispute which is already pending in court, does not create a legally enforceable agreement to arbitrate that dispute. Stated simply, this case does not present any “doubt” as to whether Ironwood’s new arbitration bylaw might apply to this case.

Finally, we note that Ironwood’s fervent commitment to the arbitration of any claims its members might choose to file against it, stands in marked contrast to its apparent unwillingness to commit its own claims to the same system. The arbitration bylaw the Club seeks to enforce here applies only to “any claim, grievance, demand, [etc.,] of or by a Member past or present, [969] [etc.]” (Italics added.) These disputes brought by members are to be arbitrated before a “mutually agreed to retired Superior Court Judge.” By its terms, then, the provision does not extend to any claims brought by the Club itself. And if that omission were not clear enough, the bylaw goes on to specify that “[t]his arbitration provision shall not apply to any dispute arising out of the Club’s decision to impose any disciplinary action upon Members as set forth in these Bylaws.” And while the bylaw also provides for arbitration of “claims by the Club against a Member for the payment of dues, assessments, fees and/or use charges,”those arbitrations are required “to be administered by a judicial arbitration company or service in Riverside County that is selected by the Club.”

(5) Such a one-sided provision, especially when coupled with the purported waiver of any award of “punitive or consequential damages,” could be deemed unconscionable. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 118 [99 Cal.Rptr.2d 745, 6 P.3d 669] [“the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself”].)

DISPOSITION

The order is affirmed. Respondents’ request for judicial notice of documents which were lodged, but not filed, in the trial court is denied. Respondents are to recover their costs on appeal.

O’Leary, P. J., and Bedsworth, J., concurred.

Appellant’s petition for review by the Supreme Court was denied April 15, 2015, S224954.

Palm Springs Villas II HOA v. Parth

(2016) 248 Cal.App.4th 268

[Fiduciary Duty; Business Judgment Rule] The Business Judgment Rule does not automatically shield a HOA director from liability that may result from the director’s failure to exercise reasonable diligence or failure to act within the scope of the director’s authority under the HOA’s governing documents.

Epsten Grinnell & Howell, Anne L. Rauch and Joyce J. Kapsal for Cross-complainant and Appellant.
Kulik Gottesman & Siegel, Leonard Siegel, Thomas M. Ware II and Francesca N. Dioguardi for Cross-defendant and Respondent.

OPINION
AARON, J.AARON, J.

I. INTRODUCTION

The Palm Springs Villas II Homeowners Association, Inc. (Association) appeals from a judgment entered in favor of Erna Parth, in connection with actions she took while simultaneously serving as president of the Association and on its Board of Directors (Board). The court granted Parth’s motion for summary judgment as to the Association’s claim for breach of fiduciary duty on the basis of the business judgment rule and an exculpatory provision contained in the Association’s Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The court had previously sustained Parth’s demurrer to the Association’s claim for breach of governing documents without leave to amend, finding that the Association failed to allege a cognizable breach.

On appeal, the Association argues that the trial court erred in its application of the business judgment rule and that there remain material issues of fact in dispute regarding whether Parth exercised reasonable diligence. We agree that the record discloses triable issues of fact that should not have been resolved on summary judgment. We therefore reverse the judgment in favor of Parth. The Association also contends that it stated a claim for breach of the governing documents and that the court erred in sustaining Parth’s demurrer. We conclude that the document cause of action is, at best, duplicative of the fiduciary breach cause and affirm the ruling sustaining the demurrer as to that cause of action without leave to amend.

II. FACTUAL AND PROCEDURAL BACKGROUND^{[fn. 1]}

A. Background on Palm Springs Villas II and its governance

The Association is the governing body for Palm Springs Villas II, a condominium development, and is organized as a nonprofit corporation under California law. The Board, comprised of five homeowners or their agents, governs the Association. The Association’s governing documents include the CC&Rs and its Bylaws. Each homeowner is an Association member and is required to comply with the terms set forth in these documents. [272]

Certain provisions reserve to the Board the authority to take particular actions. Article VI, Section 3, of the CC&Rs provides that the Board “shall have authority to conduct all business affairs of common interest to all Owners.” Article VI, Section 1, of the Bylaws describes the Board’s powers, including to “contract . . . for maintenance, . . . and services” and to “borrow money and incur indebtedness . . . provided, however, that no property of the association shall be encumbered as security for any such debt except under the vote of the majority of the members entitled to vote. . . .”

Other provisions limit the Board’s power and retain authority for the members. Article VI, Section 1, of the Bylaws explains that “[n]otwithstanding the foregoing, the Board shall not, except with the vote or written assent of a majority of the unit owners . . . [e]nter into a contract with a third person wherein the third person will furnish goods or services for the common area or the association for a term longer than one year. . . .” Article XVI, Section 2, of the CC&Rs, provides that “[n]otwithstanding any other provisions of this Declaration or the Bylaws, the prior written approval of at least two-thirds (2/3) of the . . . Owners . . . shall be required” for actions including “the . . . encumbrance, . . . whether by act or omission, of the Common Area. . . .”

The CC&Rs also contain an exculpatory provision. Article VI, Section 16, provides: “No member of the Board . . . shall be personally liable to any Owner, or to any other party, including the Association, for any damage, loss or prejudice of the Association, the Board, the Manager or any other representative or employee of the Association, or any committee, or any officer of the Association, provided that such person has, upon the basis of such information as may be possessed by him, acted in good faith, and without willful or intentional misconduct.”

During the relevant time, Parth was president of the Association, as well as a Board member.

B. Events leading to breach allegations

Roofing repairs

In 2006, the Board hired AWS Roofing and Waterproofing Consultants (AWS) in connection with roofing repairs, with the intention that AWS would vet the companies submitting bids and perform other tasks related to the repairs. According to Parth, AWS prepared a budget estimate for the repairs, the Board submitted a request to the members for a special assessment to offset these costs, and the members voted against the request. Parth then found and retained a roofing company on her own, without consulting either the Board or AWS. [273]

Parth indicated that she tried to contact the roofing company that had previously worked on the roofs, but it was no longer in business, and that she could not find another roofer due to the Association’s financial condition. She obtained the telephone number for a company called Warren Roofing from a contractor that was working on a unit. The record reflects that the person Parth contacted was Gene Layton. At his deposition, Layton stated that he held a contractor’s license for a company called Bonded Roofing and that he had a relationship with Warren Roofing, which held a roofing license. When asked about that relationship, Layton explained that on a large project, he would be the project manager.

At Parth’s deposition, Association counsel asked Parth if she had investigated whether Warren Roofing had a valid license. She replied, “[h]e does and did and bonded and insured.” Counsel clarified “[t]here’s a Bonded Roofing and Warren Roofing. Who did you hire?” Parth responded “One Roofing. That’s all one company, I think.” Counsel then asked if she had “investigate[d] whether Bonded Roofing was licensed,” and Parth answered, “I did not investigate anything.”

According to a June 2007 Board resolution, the Board hired Bonded Roofing to work on a time and materials basis. Layton said that he never met with the Board in a formal meeting or submitted a bid for the work before he started work on the roof. The Association had no records of a written contract with Bonded Roofing or any other roofer.

Warren Roofing submitted invoices and was ultimately paid more than $1.19 million for the work. Many of the checks were signed by Parth. Layton stated that “Bonded Roofing had nothing to do with the money on this job” and that he was paid by Warren Roofing. Board member Tom Thomas indicated that no invoices from Warren Roofing were included in the packets provided to the Board members each month, and Board member Robert Michael likewise did not recall having seen the invoices. Parth explained that she relied on Board member and treasurer Robert ApRoberts, a retired certified public accountant, to review invoices. Larry Gliko, the Association’s contracting expert, opined that the invoices submitted by Warren Roofing were “not at all characteristic” of those typically used in the building industry or submitted to homeowners’ associations, included amounts that Gliko viewed as unnecessary, and charged the Association “almost double” what the work should have cost. Gliko also opined that “the work performed by Warren Roofing [was] deficient,” “fell far below the standard of care,” and “require[d] significant repairs.” [274]

Repaving projects and loans

In April 2007, the Board voted to hire a construction company to repair the walkways. The Board asked the membership to vote on a special assessment to fund this and other repairs. The membership voted to approve the special assessment.

In July 2007, Parth signed promissory notes for $900,000 and $325,000, secured by the Association’s assets and property. She stated that at the time the special assessment was approved, the Board was investigating the possibility of obtaining a loan to raise the capital needed to immediately commence work on the walkway project. Thomas indicated that, as an Association member, he was never asked to approve the debt and did not learn about it until this litigation commenced. The Association had no records indicating that the members were ever informed about, or voted on, the debt.

In April 2010, the Board approved a bid from a paving company to perform repaving work. According to Parth, the Board elected to finance this repaving project with a bank loan, the Board reviewed the loan at the April 2010 meeting, and “unanimously approved” that Parth and/or ApRoberts would sign the loan documents. Parth further stated that at a special Board meeting in May 2010, attended by her, ApRoberts, and Board member Elvira Kitt-Kellam, the Board “resolved that the Association had the power to borrow and pledge collateral” and authorized her and ApRoberts to execute loan documents. Thomas stated that he never received notice of this meeting. In May 2010, Parth and ApRoberts signed a promissory note for $550,000, secured by the Association’s accounts receivable and assets. Thomas indicated that he was never asked to vote on this debt and, again, there were no Association records indicating that the members were notified about or voted on it.

In construction and business loan agreements in connection with the 2007 and 2010 notes, Parth and ApRoberts represented that the agreements were “duly authorized by all necessary action by [the Association]” and did not conflict with the Association’s organizational documents or bylaws. Parth testified at her deposition that she had not reviewed the CC&Rs or Bylaws regarding her authority to execute a promissory note and did not know whether she had such authority under the CC&Rs. In her declaration in support of summary judgment, Parth explained that she believed she “had authority to borrow money and execute loan documents on behalf of the Association in [her] capacity as president,” and was “unaware that a vote of the majority of the members was required in order to pledge the Association’s assets as security for the loan.” She also indicated that “no one advised [her] that she did not have authority to sign the loan documents . . . or that a vote of the membership was required.” [275]

Jesse’s Landscaping

At a December 2010 Board executive meeting attended by Parth, Michael, and Kitt-Kellam, those Board members approved and signed a five-year contract with Jesse’s Landscaping. Thomas indicated that he was not given notice of the meeting. At her deposition, in response to a question regarding whether she had the authority to sign a five-year contract, Parth answered, “I don’t know.” During the same line of questioning, Parth also acknowledged that her “understanding of what [her] authority is under the bylaws” was “[n]one.”

Termination of Personalized Property Management

During the relevant time period, the Association’s management company was Personalized Property Management (PPM). According to Parth, PPM’s owner advised her in or around June or July 2011 that PPM no longer wanted to provide management services for the Association. At a July 9, 2011 Board meeting regarding termination of PPM, the Board tabled any decision to terminate PPM until bids from other companies were obtained and reviewed. Parth proceeded to hire the Lyttleton Company to serve as the Association’s new management company. Thomas stated that he never received written notice of a Board meeting to vote on the hiring of Lyttleton. Parth noticed an executive meeting for July 16, 2011, to discuss termination of PPM and retention of a new company, at which time the Board voted three to two to terminate PPM. Thomas stated that he objected to the vote at the time, based on the Board’s prior decision to table the matter.

Desert Protection Security Services contract

Gary Drawert, doing business as Desert Protection Security Services (Desert Protection), had provided security services for Palm Springs Villas II since 2004. The Association executed a written contract with Desert Protection in December 2003 for one year of security services. Thomas stated that after joining the Board, he learned that Desert Protection and other vendors were providing services pursuant to “oral or month-to-month agreements.” In July 2010, the Board authorized Thomas to obtain bids from security companies to provide security services for 2011.

In January 2011, Parth signed a one-year contract with Desert Protection. Her understanding was that “any contract that was not renewed in writing would . . . be automatically renewed until terminated” and that she was [276] “merely updating the contract, as instructed by management.”^{[fn. 2]} She believed that she had the “authority to sign the contract as the Association’s president.” She further explained that, at the time, the Board had not voted to terminate Desert Protection and discussions regarding a new security company had been tabled.

There were no records indicating that Parth submitted the 2011 Desert Protection agreement to the Board for review or that the Board authorized her to execute it. According to Thomas, Parth did not inform the other Board members that she had signed the agreement. Michael likewise indicated that he had not attended any Board meeting at which the agreement was discussed, and he did not recall the Board having voted on it. Kitt-Kellam stated that the Board never authorized the contract.

In February 2011, the Association’s manager sent Parth and others an e-mail recommending that the Board update certain contracts, including the contract with Desert Protection. Thomas presented the security company bids at a March 2011 Board meeting. The Board tabled the discussion at this meeting and at the subsequent April 2011 meeting. At the July 2011 meeting, the Board approved a proposal from Securitas in a three-to-one vote, with Parth abstaining. According to Thomas, Parth did not disclose at any of these meetings that she had signed a one-year contract with Desert Protection in January 2011. Following the July 2011 Board meeting, Desert Protection was sent a 30-day termination letter, based on the Board’s understanding that the company was operating on a month-to-month basis.

In August 2011, Gary Drawert, the principal of Desert Protection, left a voice mail message for Thomas regarding the Desert Protection agreement. Thomas indicated that prior to this voice mail, he was not aware of the agreement. At the September 2011 Board meeting, Parth produced the Desert Protection agreement. The Board did not ratify it.

C. Desert Protection sues and the Association files a cross-complaint

Drawert sued the Association for breach of contract. The Association cross-complained against Desert Protection and Parth. Following an initial demurrer, the Association filed the operative First Amended Cross-Complaint. The Association settled with Drawert.

With respect to Parth, the Association asserted causes of action for breach of fiduciary duty and breach of governing documents. The cause of action for [277] breach of fiduciary duty alleged that Parth had breached her duties to comply with the governing documents and to avoid causing harm to the Association by, among other things, refusing to submit bids or contracts to the Board, “unilaterally terminating” PPM, and signing the contract with Desert Protection. The breach of governing documents cause of action identified CC&R and Bylaw provisions and identified actions taken by Parth in breach of these provisions, including the termination of PPM and entering into the Desert Protection contract.

Parth demurred to the First Amended Cross-Complaint. With respect to the governing documents claim, she contended that the claim failed to state a cause of action and was uncertain. The court sustained the demurrer without leave to amend as to this cause of action. We discuss this ruling in more detail, post.

Parth moved for summary judgment, contending that the claim of breach of fiduciary duty was barred by the business judgment rule and by the exculpatory provision in the CC&Rs. The trial court granted the motion. In doing so, the court described the business judgment rule (including the requirement that directors “act[] on an informed basis”) and observed that courts will not hold directors liable for errors in judgment, as long as the directors were: “(1) disinterested and independent; (2) acting in good faith; and (3) reasonably diligent in informing themselves of the facts.” The court further noted that the plaintiff has the burden of demonstrating, among other things, that “the decision . . . was made in bad faith (e.g., fraudulently) or without the requisite degree of care and diligence.”^{[fn. 3]}

The court found that Parth had set forth sufficient evidence that she was “disinterested,” and that she had “acted in good faith and without willful or intentional misconduct,” and “upon the basis of such information as she possessed.” The burden shifted to the Association to establish a triable issue of material fact and the court found that the Association failed to satisfy this burden. As to bad faith, the court found that there was a triable issue as to whether Parth had violated the governing documents, but that such a violation would be insufficient to overcome the business judgment rule or the exculpatory provision of the CC&Rs. With respect to diligence, the court found no [278] evidence that Parth “did not use reasonable diligence in ascertaining the facts.” According to the court, the “gravamen of the [Association’s] claims is . . . that Parth repeatedly acted outside the scope of her authority,” and that “[t]he problem with this argument is that Parth believed in her authority to act and the need to act, and the [Association] [fails to] offer any evidence to the contrary, except to say that Parth’s actions violated the . . . CC&Rs.”

The trial court also ruled on the Association’s evidentiary objections; the parties do not indicate whether the court ruled on Parth’s objections. The court entered judgment for Parth and the Association timely appealed.

III. DISCUSSION

A. Motion for summary judgment

The Association claims that the trial court erred in granting Parth’s motion for summary judgment.

Governing law

A defendant moving for summary judgment “bears the burden of persuasion that there is no triable issue of material fact and that [the defendant] is entitled to judgment as a matter of law.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850 (Aguilar).) To meet this burden, the defendant must show that one or more elements of the cause of action cannot be established, or that there is a complete defense to that cause of action. (Ibid.) Once the defendant satisfies its burden, “`the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto.’” (Id. at p. 849.) “Because a summary judgment denies the adversary party a trial, it should be granted with caution.” (Colores v. Board of Trustees (2003) 105 Cal.App.4th 1293, 1305.)

We review a trial court’s grant of summary judgment de novo. (Buss v. Superior Court (1997) 16 Cal.4th 35, 60.) “[W]e must assume the role of the trial court and redetermine the merits of the motion. In doing so, we must strictly scrutinize the moving party’s papers. [Citation.] The declarations of the party opposing summary judgment, however, are liberally construed to determine the existence of triable issues of fact. All doubts as to whether any material, triable issues of fact [279] exist are to be resolved in favor of the party opposing summary judgment.” (Barber v. Marina Sailing, Inc. (1995) 36 Cal.App.4th 558, 562.)^{[fn, 4]}

Application

a. Principles governing decisionmaking by a director

“The common law `business judgment rule’ refers to a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. . . . Under this rule, a director is not liable for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 (Gaillard); see Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 123 (Ritter) [business judgment rule “sets up a presumption that directors’ decisions are based on sound business judgment”].)

In California, there is a statutory business judgment rule. Corporations Code section 7231 applies to nonprofit corporations and provides that “[a] director shall perform the duties of a director, . . ., in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (§ 7231, subd. (a); see Ritter, supra, 166 Cal.App.4th at p. 123.) The statute goes on to state that “[a] person who performs the duties of a director in accordance [with the preceding subdivisions] . . . shall have no liability based upon any alleged failure to discharge the person’s obligations as a director. . . .” (§ 7231, subd. (c); see Ritter, at p. 123; see also § 7231.5, subd. (a) [limiting liability on the same grounds for volunteer directors and officers].)^{[fn. 5]}

“Notwithstanding the deference to a director’s business judgment, the rule does not immunize a director from liability in the case of his or her abdication of corporate responsibilities.” (Gaillard, supra, 208 [280] Cal.App.3d at p. 1263.) “`The question is frequently asked, how does the operation of the so-called `business judgment rule’ tie in with the concept of negligence? There is no conflict between the two. When courts say that they will not interfere in matters of business judgment, it is presupposed that judgment—reasonable diligence—has in fact been exercised. A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.’” (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852-853 (Burt);Gaillard, supra, at pp. 1263-1264 [accord].)

Put differently, whether a director exercised reasonable diligence is one of the “factual prerequisites” to application of the business judgment rule. (Affan v. Portofino Cove Homeowners Assn. (2010) 189 Cal.App.4th 930, 941 (Affan); id. at p. 943 [finding a homeowners association “failed to establish the factual prerequisites for applying the rule of judicial deference” at trial, where “there was no evidence the board engaged in `reasonable investigation’ (citation) before choosing to continue its `piecemeal’ approach to sewage backups”]; see §§ 7231, subd. (a), 7231.5, subd. (a); see also Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 253 (Lamden) [requiring “reasonable investigation” for judicial deference]; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 432 (Everest) [accord].)

b. The business judgment rule on summary judgment

The business judgment rule “raises various issues of fact,” including whether “a director acted as an ordinarily prudent person under similar circumstances” and “made a reasonable inquiry as indicated by the circumstances.” (Gaillard, supra, 208 Cal.App.3d at p. 1267.) “Such questions generally should be left to a trier of fact,” but can become questions of law “where the evidence establishes there is no controverted material fact.” (Id. at pp. 1267-1268.) “The function of the trial court in ruling on [a] motion[] for summary judgment [is] merely to determine whether such issues of fact exist, and not to decide the merits of the issues themselves. [Citation.] Our function is the same as that of the trial court.” (Id. at p. 1268; see id. at p. 1271 [identifying a triable issue of fact as to whether it was reasonable for the directors on the compensation committee to rely on outside counsel “with no further inquiry,” and observing that “[a] trier of fact could reasonably find that the circumstances warranted a thorough review of the golden parachute agreements”]; id. at pp. 1271-1272 [noting a “triable issue of fact as to whether some further inquiry” was warranted by the other directors regarding [281] the golden parachutes, under the circumstances, notwithstanding that they were entitled to rely on the recommendation of the compensation committee].)^{[fn. 6]}(Cf. Harvey v. The Landing Homeowners Assn. (2008) 162 Cal.App.4th 809, 822 [affirming summary judgment in dispute over attic space use where undisputed evidence showed the board, upon “reasonable investigation” and in good faith “properly exercised its discretion within the scope of the CC&R’s. . . .”].)

c. The trial court erred in granting summary judgment

The Association raises two challenges to the summary judgment ruling: that the trial court erred by applying the business judgment rule to Parth’s ultra vires acts (or conduct otherwise outside Parth’s authority) and that there are triable issues of material fact as to whether Parth exercised reasonable diligence.

i. Ultra vires conduct

The Association has not established that Parth’s conduct was ultra vires. Ultra vires conduct is conduct that is beyond the power of the corporation, not an individual director. (See McDermott v. Bear Film Co. (1963) 219 Cal.App.2d 607, 610-611 [“In its true sense the phrase ultra vires describes action which is beyond the purpose or power of the corporation.”]; Sammis v. Stafford (1996) 48 Cal.App.4th 1935, 1942 [“If, however, the director’s act was within the corporate powers, but was performed without authority or in an unauthorized manner, the act is not ultra vires.”].) The Association does not distinguish these authorities, nor does it identify conduct by Parth that went beyond the power of the Association.

However, the Association does cite cases suggesting that noncompliance with governing documents may fall outside the scope of the business judgment rule, at least in certain circumstances. (See Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374 [282] (Nahrstedt) [finding “courts will uphold decisions made by the governing board of an owners association,” where among other things, they “are consistent with the development’s governing documents”]; Lamden, supra,21 Cal.4th at p. 253 [requiring that association board “exercise[] discretion within the scope of its authority under relevant statutes, covenants and restrictions” in order to merit judicial deference]; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 979 [accord]; Scheenstra v. California Dairies, Inc. (2013) 213 Cal.App.4th 370, 388 [finding a “board’s decision is not scrutinized under the business judgment rule . . . until after the court determines that the action . . . falls with the discretionary range of action authorized by the contract”].) See also Ekstrom v. Marquesa at Monarch Beach Homeowners Assn. (2008) 168 Cal.App.4th 1111, 1123 (“Even if the Board was acting in good faith . . ., its policy . . . was not in accord with the CC&Rs. . . . The Board’s interpretation of the CC&Rs was inconsistent with the plain meaning of the document and thus not entitled to judicial deference.”).

Parth contends that the business judgment rule protects a director who violates governing documents, as long as the director believes that the actions are in the best interests of the corporation. She relies on Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125 (Biren). Biren, which involved a dispute between a company and a former director, held that the “business judgment rule may protect a director who acts in a mistaken but good faith belief on behalf of the corporation without obtaining the requisite shareholder approval.” The Biren court determined that the director in question was protected by the rule, even though she violated the shareholder agreement. (Id. at pp. 131-132.) However, the court did not suggest that such conduct would always be protected. Rather, the court concluded that the violation “did not by itself make the business judgment rule inapplicable,” explaining that the company failed to prove that the director had “intentionally usurped her authority” or that “her actions were anything more than an honest mistake.” (Id. at p. 137.) The court also noted the trial court’s “finding that [the director] `reasonably relied’ on information she believed to be correct,” observing that this was “tantamount to a finding she acted in good faith.” (Id. at p. 136.) In other words, Biren held that the director’s violation of the governing documents did not render the business judgment rule inapplicable under the circumstances; namely, where the remainder of the business judgment rule requirements were satisfied.

Here, the trial court agreed that there was a triable issue of material fact as to whether Parth breached the governing documents, but concluded that even if she had, this was insufficient to overcome the protection of the business judgment rule. However, the case law is clear that conduct contrary to [283] governing documents may fall outside the business judgment rule. (See, e.g., Nahrstedt, supra, 8 Cal.4th at p. 374.) Even if Biren establishes an exception to this principle where the director has satisfied the remaining elements of the business judgment rule, in this case, triable issues of material fact exist as to other elements of the rule and renderBireninapplicable, at least at this stage. The trial court erred in assuming that the business judgment rule would apply to Parth’s actions that violated the governing documents.

ii. Material issues of fact

Although the trial court properly recognized that a director must act on an informed basis, be reasonably diligent, and exercise care in order to rely on the business judgment rule, the court erred in concluding that the Association failed to demonstrate triable issues of fact with respect to these matters. (See Gaillard, supra, 208 Cal.App.3d at pp. 1271-1272, 1274 [reversing summary judgment due to material issues of fact as to whether further inquiry was warranted].) We conclude that material issues of fact exist as to whether Parth exercised reasonable diligence in connection with the actions at issue.

First, with respect to the roofing repairs, Parth explained how she found Warren Roofing and testified at her deposition that Warren Roofing was licensed. However, during the same line of questioning, she displayed ignorance of the relationship between Warren Roofing and Bonded Roofing and admitted that she had not “investigate[d] anything” pertaining to whether Bonded Roofing was licensed. The Association also established that Parth retained a roofing contractor without any formal bid or contract, that the Board retained Bonded Roofing but paid Warren Roofing, that Warren Roofing may have significantly overcharged the Association for the work performed, and that this work was defective and required repair.^[7] This evidence is sufficient to raise an issue as to Parth’s diligence in investigating, retaining, and paying the roofers. (See Affan, supra, 189 Cal.App.4th at pp. 941, 943 [business judgment rule did not apply where, among other things, there was no evidence of a reasonable investigation into sewage work].)^{[fn. 8]} Parth’s reliance on ApRoberts to review invoices does not resolve these issues. (See Gaillard, supra,208 Cal.App.3d at p. 1271 [although the directors could rely upon the recommendations of outside counsel and the [284] compensation committee, triable issues existed as to whether further inquiry was still required under the circumstances].)

Second, the 2007 and 2010 promissory notes, secured by Association assets, similarly raise issues as to whether Parth proceeded on an informed basis. She relies on her belief that she had the authority to take out the loans, her lack of awareness that a member vote was required to encumber the assets of the Association, and that no one advised her that she lacked the authority or that membership approval was required. She also states in her declaration that she and two other Board members authorized her and ApRoberts to sign the 2010 note. However, as the Association points out, the governing documents require member approval for such debt and there is no record of such approval. Parth’s deposition testimony also reflects that she did not know whether she had the authority under the governing documents to sign the loans, and that she made no effort to determine whether she had such authority. Whether Parth exercised sufficient diligence to inform herself of the Association’s requirements pertaining to the loans at issue is a question for the trier of fact. (See Gaillard, supra, 208 Cal.App.3d at p. 1267; id. at p. 1271 [noting triable issue as to whether the “circumstances warranted a thorough review of the . . . agreements”].) Parth “cannot close [her] eyes” to matters as basic as the provisions of the CC&Rs and Bylaws of the Association and at the same time claim that she “exercis[ed] business judgment.” (Id. at p. 1263.)

Third, as to Jesse’s Landscaping, Parth indicated that three Board members, including herself, approved a five-year contract in 2010. However, the Association provided evidence that the governing documents require that a contract with a third party exceeding one year be approved by member vote. In addition, Parth acknowledged at her deposition that she did not know whether she had the authority to sign a five-year contract, and that she had no understanding of what her authority was under the Bylaws. This evidence suggests that Parth may not have understood, nor made any effort to understand, whether the Board was permitted to authorize the Jesse’s Landscaping contract without member approval. As with the loans, Parth’s admitted lack of effort to inform herself of the extent of her authority in this regard is sufficient to establish a triable issue. (See Gaillard, supra, 208 Cal.App.3d at pp. 1263, 1267, 1271.)

Fourth, regarding the PPM termination, Parth explained that PPM’s owner did not want PPM to be the management company for the Association any [285] longer and that the Board subsequently voted to terminate PPM on July 16, 2011. However, the Association’s evidence reflects that the Board had tabled the issue of the termination of PPM on July 9 and that Parth met with and hired Lyttleton Company, apparently without calling a Board meeting to vote on the matter. The timeline of these events is somewhat unclear, including whether Parth hired Lyttleton before the Board voted to terminate PPM, but we will not attempt to resolve such factual issues on summary judgment. Regardless of the timing, the evidence presented as to the matter raises questions as to whether Parth proceeded with reasonable diligence. (See Gaillard, supra, 208 Cal.App.3d at pp. 1271-1272; Affan, supra, 189 Cal.App.4th at pp. 941, 943.)

Finally, the Desert Security contract similarly calls into question Parth’s diligence. Parth offered several explanations for her execution of the contract with Desert Security in January 2011, despite the Board’s decision to consider bids from other companies for security services. Some of her explanations were inconsistent,^[fn.9]and the Association’s evidence cast doubt on all of them. With respect to Parth’s stated belief that she had the authority to sign the contract, the Association provided evidence in other contexts (e.g., the promissory notes) that Parth failed to understand the scope of her authority; this same evidence suggests that she made no effort to ascertain what authority she did possess to conduct the business of the Association. The business judgment rule would not extend to such willful ignorance. (See Gaillard, supra, 208 Cal.App.3d at p. 1263.) Parth also indicated that at the time she signed the contract, the Board had tabled the security discussion and had not yet terminated Desert Protection. However, the Association provided evidence that Parth failed to bring the new contract to the attention of the Board or alert the Board to its existence, even after the security discussion had been reopened, thus calling into question Parth’s explanations. This conduct raises serious questions as to Parth’s diligence, particularly given the timing of the relevant events. (Id. at p. 1271 [noting the “nature” and “timing” of the agreements at issue].)

Although the trial court declined to address much of the Association’s evidence, it did discuss the Desert Protection situation. The court stated that the Association disputed the basis for Parth’s belief in her authority to sign the Desert Protection contract by citing the Bylaws, and concluded that this evidence did not controvert Parth’s professed belief. While the Bylaws may [286] not undermine Parth’s belief, together with the Association’s other evidence, they do demonstrate the existence of a triable issue of material fact as to whether Parth’s proceeding on such belief—without keeping the Board informed—showed reasonable diligence under the circumstances.

In sum, the Association produced evidence establishing the existence of triable issues of material fact as to whether Parth acted on an informed basis and with reasonable diligence, precluding summary judgment based on the business judgment rule. The trial court’s erroneous conclusion that “there [was] no evidence that Parth did not use reasonable diligence” reflects a misapplication of the business judgment rule, summary judgment standards, or both. To the extent that the court viewed the Association’s evidence regarding Parth’s diligence as irrelevant, in light of her “belief[] in [her] authority to act and the need to act,” the court failed to apply the reasonable diligence requirement in any meaningful way. Permitting directors to remain ignorant and to rely on their uninformed beliefs to obtain summary judgment would gut the reasonable diligence element of the rule and, quite possibly, incentivize directors to remain ignorant. To the extent that the trial court did consider the Association’s evidence, but found it insufficient to establish a lack of diligence, the court improperly stepped into the role of fact finder and decided the merits of the issue.

In addition, the Association contends that courts treat diligence and good faith as intertwined, citing Biren’s description of the trial court’s finding that the director reasonably relied on information she believed to be correct as “tantamount” to a finding of good faith. (See Biren, supra, 102 Cal.App.4th at p. 136.) Our own research reveals that other courts similarly have considered diligence as part of the good faith inquiry. (See, e.g., Affan, supra, 189 Cal.App.4th at p. 943 [“Nor was there evidence the Association acted `in good faith . . ., because no one testified about the board’sdecisionmaking process. . . . [¶] [I]n Lamden, ample evidence demonstrated the association board engaged in the sort of reasoned decisionmaking that merits judicial deference. There is no such showing in the case before us.”]; see also Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 189 [“[T]he court must look into the procedures employed and determine whether they were adequate or whether they were so inadequate as to suggest fraud or bad faith. That is, `[p]roof . . . that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by that doctrine.’”].) In light of these [287] authorities, we recognize that there may be a triable issue of material fact as to Parth’s good faith, as well.^{[fn. 10]}

iii. Parth’s contentions

As a preliminary matter, Parth contends that “[v]irtually all of the evidence proffered in opposition to the motion for summary judgment was inadmissible,” but cites only her own evidentiary objections, rather than any ruling by the trial court. She also does not offer any argument regarding the evidence itself, other than to state generally that evidence without foundation is inadmissible (and, with one exception not relevant here, does not identify any specific evidence). We conclude that Parth has forfeited these objections. (Stanley, supra, 10 Cal.4th at p. 793; Del Real v. City of Riverside(2002) 95 Cal.App.4th 761, 768 [“[I]t is counsel’s duty to point out portions of the record that support the position taken on appeal. . . .”]; ibid. [“[A]ny point raised that lacks citation may, in this court’s discretion, be deemed waived.”].)

Turning to Parth’s substantive arguments, we first address her contention that she displayed no bad faith. She relies on cases characterizing bad faith as intentional misconduct, encompassing fraud, conflicts of interest, and intent to serve an outside purpose. (See, e.g., Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal.App.4th 365, 379.) However, the Association’s appeal focuses on Parth’s failure to exercise reasonable diligence, so establishing an absence of evidence of intentional misconduct unrelated to diligence does not undermine the Association’s arguments.

Next, Parth suggests that the Association’s concerns with respect to her lack of diligence in securing a roofing contractor sound in negligence, contending that “a director’s conduct or decisions are not judged according to a negligence standard.” (Boldface omitted.) However, as the authorities [288] discussed ante make clear, there is “no conflict” between the business judgment rule and negligence, and application of that rule “presuppose[s] that . . . reasonable diligence [] has in fact been exercised.” (Gaillard, supra, 208 Cal.App.3d at pp. 1263-1264, quoting Burt, supra, 237 Cal.App.2d at pp. 852-853; Affan, supra, 189 Cal.App.4th at p. 941.)

Parth’s reliance on the exculpatory clause of the Association’s CC&Rs is similarly unpersuasive. She contends that even if she exceeded her authority, the “only condition for the stated contractual immunity is that the board members perform their duties in `good faith, and without willful or intentional misconduct.’” However, she fails to address the immediately preceding clause, which requires that the director act “upon the basis of such information as may be possessed by [her].” This language is arguably analogous to the business judgment rule’s reasonable diligence requirement. (Gaillard, supra, 208 Cal.App.3d at pp. 1263-1264.) At minimum, even if the exculpatory provision did not obligate Parth to obtain additional information regarding particular undertakings, it surely contemplated that she would familiarize herself with information already in her possession—such as the governing documents of the Association. Further, both the business judgment rule and the exculpatory clause of the CC&Rs require good faith and, as discussed ante, an absence of diligence may reflect a lack of good faith. Given this overlap, we conclude that at least some of the triable issues of material fact that bar summary judgment with respect to the business judgment rule similarly preclude it as to the exculpatory clause.^{[fn. 11]}

Finally, we address Parth’s contention that the Association’s claim is time barred to the extent that it concerns events that occurred prior to May 22, 2008. Parth contends that there is a four-year statute of limitations for a breach of fiduciary duty claim and that admissible evidence is required to support the claim, but does not explain how these principles would permit her to obtain summary judgment as to a portion of a cause of action. We agree with the Association both that Parth’s attempt to apply the statute of limitations to obtain judgment on a part of its breach of fiduciary duty claim is improper and that the existence of material questions of fact preclude resolution of statute of limitations issues at this juncture. (See McCaskey v. California State Automobile Assn. (2010) 189 Cal.App.4th 947, 975 [“there can be no summary adjudication of less than an entire cause of action. . . . If a cause of action is not shown to be barred in its entirety, no order for summary judgment—or adjudication—can be entered.” [289]]; Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1112[“resolution of the statute of limitations issue is normally a question of fact”].)

B. Demurrer

The Association contends that the trial court erroneously granted Parth’s demurrer to its cause of action for breach of governing documents, without leave to amend.

Governing law

We review a ruling sustaining a demurrer de novo, exercising independent judgment as to whether the complaint states a cause of action as a matter of law. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115.) “We affirm the judgment if it is correct on any ground stated in the demurrer, regardless of the trial court’s stated reasons.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 111.) Further, “`[i]f another proper ground for sustaining the demurrer exists, this court will still affirm the demurrer[ ]. . . .’” (Jocer Enterprises, Inc. v. Price(2010) 183 Cal.App.4th 559, 566.)

When a demurrer is sustained without leave to amend, “we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 (Blank).)

Application

With respect to the Association’s cause of action for breach of governing documents, the trial court ruled: “The HOA has not alleged that Parth breached any covenant. The only sections of the governing documents referred to in the cross-complaint are bylaws that deal with the Boards [sic] transaction of the Associations [sic] business affairs 7-11. These sections describe how the Board acts. It . . . does not appear that they are covenants between the HOA and individual members that the HOA may sue to enforce.”

First, the Association does not cite only the Bylaws; it also cites the CC&R provision reserving authority over the Association’s affairs to the Board. In any event, we see no reason why the governing document provisions would be unenforceable as to Parth, an owner and Association member who was [290] serving as president and was a member of the Board. (See Civ. Code, § 5975, subd. (a) [“The covenants and restrictions in the declaration shall be enforceable equitable servitudes . . . and bind all owners” and generally “may be enforced by . . . the association”], subd. (b) [“A governing document other than the declaration may be enforced by the association against an owner”]; see also, e.g., Biren, supra, 102 Cal.App.4th at p. 141 [affirming judgment against director for breach of shareholder agreement];Briano v. Rubio(1996) 46 Cal.App.4th 1167, 1172, 1180 [affirming judgment against directors for violation of articles of incorporation].)

Regardless, as Parth argues, the cause of action for breach of governing documents appears to be duplicative of the cause of action for breach of fiduciary duty. This court has recognized this as a basis for sustaining a demurrer. (See Rodrigues v. Campbell Industries (1978) 87 Cal.App.3d 494, 501 [finding demurrer was properly sustained without leave to amend as to cause of action that contained allegations of other causes and “thus add[ed] nothing to the complaint by way of fact or theory of recovery”]; see also Award Metals, Inc. v. Superior Court (1991) 228 Cal.App.3d 1128, 1135 [Second Appellate District, Division Four; demurrer should have been sustained as to duplicative causes of action].)^{[fn. 12]} The Association does not address Parth’s argument or explain how its document claim differs from the fiduciary breach claim. We conclude that the trial court properly sustained the demurrer.

Second, the burden is on the Association to articulate how it could amend its pleading to render it sufficient. (Blank, supra, 39 Cal.3d at p. 318; Goodman v. Kennedy(1976) 18 Cal.3d 335, 349 [“Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.”].) The Association offers no argument on this point and we therefore conclude that it has forfeited the issue. (Stanley, supra, 10 Cal.4th at p. 793.)

IV. DISPOSITION

The order granting summary judgment and judgment are reversed. The ruling sustaining the demurrer to the breach of governing documents cause of [291] action without leave to amend is affirmed. The parties shall bear their own costs on appeal.

HUFFMAN, Acting P. J. and PRAGER, J.,^{[fn. *]} concurs.

[FN. 1] We rely on the facts that the parties set forth in their separate statements in the trial court and the evidence cited therein, as well as other evidence submitted with the parties’ papers below. (Sandell v. Taylor-Listug, Inc. (2010) 188 Cal.App.4th 297, 303, fn. 1.) However, we do not rely on evidence to which objections were sustained. (Wall Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th 1171, 1176.)

[FN. 2] Although Parth’s statement that she believed that she had been instructed by management to enter into the contract with Desert Protection is in the record, the trial court sustained an objection to her declaration statement that she was told that the contract “needed to be updated and was ready to be signed.”

[FN. 3] The trial court also stated that the “business judgment rule standard is one of gross negligence—i.e., failure to exercise even slight care,” citing Katz v. Chevron (1994) 22 Cal.App.4th 1352. The court did not explain how this standard relates to the components of the business judgment rule. The parties likewise cite the concept without such analysis. Given that Katz relies on Delaware law for this standard and the issues before us can be resolved according to the standard of reasonable diligence under California law, we will not focus on gross negligence in our analysis. However, the facts that raise a triable issue as to Parth’s diligence, discussed post, would also raise an issue as to whether she exercised “even slight care.”

[FN. 4] Contrary to Parth’s claim, a summary judgment is not “entitled to a presumption of correctness.” The cases on which she relies simply confirm the general principle that an appellant must establish error on appeal. (See, e.g., Denham v. The Superior Court of Los Angeles County (Marsh & Kidder) (1970) 2 Cal.3d 557, 564 [“[E]rror must be affirmatively shown.”]; Reyes v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6 [“Although our review of a summary judgment is de novo, it is limited to issues which have been adequately raised and supported in [appellants’] brief.”].)

[FN. 5] All further statutory references are to the Corporations Code unless otherwise indicated.

[FN. 6] (See Everest, supra, 114 Cal.App.4th at p. 430 [finding that triable issues of fact as to the existence of improper motives and a conflict of interest “preclude[d] summary judgment based on the business judgment rule”]; Will v. Engebretson & Co. (1989) 213 Cal.App.3d 1033, 1044 [“Will submitted evidence that . . . the committee members never reviewed the complaint, the financial records of the corporation, or made any investigation into the matter at all. Company, of course, disputes these allegations. But it is precisely because the issues are disputed that it was error for the trial court to resolve the issues. . . .”].)

[FN. 7] There also was no evidence of a written warranty for the roofing work. Layton testified at deposition that he provided a warranty, but did not indicate that it was written, and Parth contends only that she obtained a verbal warranty.

[FN. 8] The Association contends that both Warren Roofing and Bonded Roofing were unlicensed at the time the roofing work was done, while Parth maintains that Warren Roofing was licensed. We need not address this dispute. Although the existence of facts that the exercise of proper diligence might have disclosed (such as license status) may be relevant to whether Parth exhibited reasonable diligence (see Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1046), we conclude that her admission that she “did not investigate anything,” in the context of a major repair project, is sufficient to raise a triable issue.

[FN. 9] For example, Parth indicated both that she believed nonwritten contracts would be automatically renewed and that she was “merely updating” the contract, without explaining why a new or updated contract would be necessary if the existing contract would automatically be renewed.

[FN. 10] The Association also appears to challenge several other actions on the part of Parth, but fails to support its challenge with argument and/or specific authority. These actions include Parth’s execution of the Board member Code of Conduct, certain purported violations of the Common Interest Open Meeting Act and Davis-Stirling Common Interest Development Act, and various facts pertaining to bad faith. We deem these matters forfeited. (People v. Stanley (1995) 10 Cal.4th 764, 793 (Stanley) [it is not the reviewing court’s role to “construct a theory” for appellant: “[E]very brief should contain a legal argument with citation of authorities on the points made. If none is furnished on a particular point, the court may treat it as waived. . . .”].) In addition, because we conclude that the Association has established the existence of triable issues of material fact as to both the business judgment rule and the exculpatory provision of the CC&Rs, see discussion post, we need not reach its arguments under section 5047.5 and Civil Code section 5800 or its argument that Parth is estopped from claiming ignorance of the governing documents.

[FN. 11] We reject Parth’s claim that the Association waived the exculpatory clause issue. Although the Association did not address the issue until its reply brief, it takes the position on reply that the exculpatory clause is “a recitation of the business judgment rule.” Parth, meanwhile, relied on the same undisputed facts to support both issues. Under the circumstances, we see no reason to preclude the Association from relying on its business judgment rule arguments and evidence for the exculpatory clause issue.

[FN. 12] But see Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 890(Sixth Appellate District) (finding that duplication is not grounds for demurrer and that a motion to strike is the proper way to address duplicative material).

[FN. *] Judge of the San Diego Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

SB 814 (Hill). Drought: Excessive Water Use: Urban Retail Suppliers.

Would prohibit excessive water use by a residential customer during a state of drought emergency. Would require urban retail water suppliers to establish a method to identify and discourage excessive water use.

Current Status: Chaptered

FindHOALaw Quick Summary:

Existing law requires the Department of Water Resources (DWR) and the State Water Resources Control Board (SWRCB) to take appropriate actions to prevent unreasonable uses or wasting of water. Existing law authorizes a public entity that supplies water to adopt and enforce water conservation programs to reduce water usage and conserve water.

SB 814 (Hill) would add Section 1 to Chapter 3.3 of Division 1 of the Water Code to prohibit excessive water use by a residential customer during a drought. It would require “urban water suppliers” to establish methods to identify and restrict excessive water use (i.e., the establishment of a rate structure using block tiers, water budgets, penalties for prohibited uses, or rate surcharges). The Bill will also authorize the establishment of excessive use water ordinances and make violations of such ordinances punishable by a fine of at least $500 per 100 cubic feet of water above established thresholds. SB 814 would also specify that the State is not required to reimburse local agencies or school districts for any costs they incur in adopting and/or complying with State-mandated water conservation measures. SB 814’s changes to the law would apply only during periods of government-declared droughts.

**UPDATE: SB 814 was signed by the Governor on August 30, 2016. It’s changes to the law will become operative on January 1, 2017.

View more info on SB 814
from the California Legislature's website

Heather Farms Homeowners Association v. Robinson

(1994) 21 Cal.App.4th 1568

[Attorney’s Fees; Prevailing Party] The determination as to who is the “prevailing party” entitled to its attorney’s fees under the Davis-Stirling Act is based on the court’s analysis of which party prevailed on a practical level. When that determination is made, the court’s ruling should be affirmed on appeal absent an abuse of discretion.

Smith, Merrill & Peffer, Charles E. Merrill and Karl R. Molineux for Defendant and Appellant.
Abend, Lepper, Jacobson, Schaefer & Hughes and Gary M. Lepper for Plaintiff and Respondent.

OPINION
PETERSON, P. J.

In this case, we hold that a trial court has the authority to determine the identity of the “prevailing party” in litigation, within the meaning of Civil Code ^{fn. 1} section 1354, for purposes of awarding attorney fees; and that a defendant dismissed without prejudice in an action to enforce equitable servitudes thereunder is not, ipso facto, such prevailing party.

I. Factual and Procedural Background

This is a dispute over attorney fees incurred in an action to enforce the covenants, conditions, and restrictions (CC&R’s) which govern a residential planned unit development in Walnut Creek. Appellant in this action, Wayne Robinson, owned two units in the development. In January 1988, Heather Farms Homeowners Association, Inc. (association), the entity charged with enforcing the CC&R’s, sued Robinson alleging he had made unauthorized modifications to his units. As so frequently happens in modern litigation, the complaint spawned a complex series of cross-complaints and subsidiary actions which eventually entangled the association itself, the association’s attorneys, appellant’s corporation, various real estate agents, and the persons who purchased appellant’s units while the litigation was pending.

After several years of litigation, the actions were assigned to a trial judge (the Honorable Peter L. Spinetta) who, recognizing the complexity of the dispute, referred the matter to a second judge (the Honorable James J. Marchiano) for a special settlement conference. After two days of discussion, Judge Marchiano negotiated a settlement which resolved the litigation completely.

Only one aspect of that settlement is relevant to this appeal. While Robinson expressly declined to participate in any agreement with the association, the settlement nonetheless required the association to dismiss its suit against Robinson “without prejudice.” However, Judge Marchiano cautioned [1571] that this should not be interpreted as meaning that Robinson had prevailed: “The Court is making a specific finding that there are no prevailing parties with respect to that issue [the dismissal without prejudice] and that the Court and the law [favor the] resolution of disputes. This dismissal is part of an overall complex piece of litigation … that’s been resolved by a negotiated settlement. There are no winners. There are no favorable parties in this case.”

At the conclusion of the settlement, Robinson filed a memorandum seeking to recover his costs from the association. He claimed that since the object of the association’s suit was to enforce the development’s CC&R’s, the “prevailing party” in the litigation was entitled to recover attorney fees and costs under section 1354. Robinson maintained that since he had received a dismissal, he was the “prevailing party” and the association was obligated to pay his attorney fees of over $479,000, and his litigation costs of approximately $20,000.

The association conceded that section 1354 was applicable, but argued Robinson was not the “prevailing party” within the meaning of that section.

The trial court ruled that Robinson was the prevailing party for purposes of his general litigation expenses (filing fees, deposition costs, jury fees, etc.) and, thus, was entitled to recover those costs from the association, but that Robinson was not entitled to recover his attorney fees under section 1354. As to the latter issue, the court agreed with the settlement judge and concluded there was no “prevailing party” in the litigation within the meaning of section 1354. This appeal followed.

II. Discussion

The issue in this case is whether the trial court properly ruled that Robinson was not the “prevailing party” in the litigation within the meaning of section 1354. Section 1354 states that CC&R’s may be enforced as “equitable servitudes” by “any owner of a separate interest or by the association, or by both,” and that the “prevailing party” in any enforcement action “shall be awarded reasonable attorney’s fees and costs.” ^{fn. 2}

[1a] The pivotal question here is how does a court determine who is the “prevailing party” for purposes of section 1354. The section itself provides no guidance and the issue has apparently not been decided by any court. [1572]

Robinson claims the court was obligated to adopt the definition found in the general cost statute, Code of Civil Procedure section 1032, subdivision (a)(4), which states a ” ‘[p]revailing party’ ” includes “a defendant in whose favor a dismissal is entered ….” Robinson argues that, since he was the recipient of a dismissal and was awarded his general litigation costs, he must also be deemed the prevailing party for purposes of section 1354.

However, the premise for this argument, that a litigant who prevails under the cost statute is necessarily the prevailing party for purposes of attorney fees, has been uniformly rejected by the courts of this state. (See McLarand, Vasquez & Partners, Inc. v. Downey Savings & Loan Assn. (1991) 231 Cal.App.3d 1450, 1456 [282 Cal.Rptr. 828] [“We emphatically reject the contention that the prevailing party for the award of costs under [Code of Civil Procedure] section 1032 is necessarily the prevailing party for the award of attorneys’ fees.”].) Furthermore, Code of Civil Procedure section 1032, subdivision (a) only defines ” ‘[p]revailing party’ ” as the term is used “in [that] section.” It does not purport to define the term for purposes of other statutes.

The association, for its part, claims the trial court was required to adopt the definition found in section 1717, subdivision (b)(2) which states, “Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.” However, section 1717 only applies “In any action … where the contract specifically provides that attorney’s fees and costs … shall be awarded ….” (Subd. (a), italics added.) Here, both sides agree there was no contract upon which attorney fees might be based. Instead, fees were sought pursuant to statute. ^{fn. 3}

While the definition of “prevailing party” found in section 1717, subdivision (b) or in Code of Civil Procedure section 1032 might otherwise be persuasive as to the meaning intended in section 1354, under the principle that similar language used in statutes “in pari materia” should be given similar effect (see, e.g., Isobe v. Unemployment Ins. Appeals Bd. (1974) 12 [1573] Cal.3d 584, 590-591 [116 Cal.Rptr. 376, 526 P.2d 528]; Housing Authority v. Van de Kamp (1990) 223 Cal.App.3d 109, 116 [272 Cal.Rptr. 584]), that rule of construction is of little help here. Section 1717, subdivision (b) and Code of Civil Procedure section 1032 are both “in pari materia” with section 1354 in a broad sense, yet they provide conflicting definitions of the critical term. Neither party to this appeal has supplied a principled reason why we should select one definition over the other.

Faced with this lack of authority, we examine how the courts have dealt with similar statutes. In Winick Corp. v. Safeco Insurance Co. (1986) 187 Cal.App.3d 1502 [232 Cal.Rptr. 479], the issue was whether a defendant, who obtained a dismissal with prejudice because the plaintiff failed to timely serve the summons, was a prevailing party within the meaning of section 3250 and entitled to attorney fees. The court observed that the term “prevailing party” as used in section 3250 had not been definitively interpreted, so it analogized the problem to a Supreme Court case in which the issue was whether a party had prevailed for purposes of awarding attorney fees under Code of Civil Procedure section 1021.5, the private attorney general statute. Noting the court in that case conducted a ” ‘pragmatic inquiry’ ” into whether a party prevailed, the Winick court conducted a similar pragmatic inquiry and concluded a defendant, who obtains a dismissal with prejudice because the plaintiff fails to timely serve the complaint, has also prevailed and is entitled to attorney fees. (187 Cal.App.3d at pp. 1506-1508.)

In Donald v. Cafe Royale, Inc. (1990) 218 Cal.App.3d 168 [266 Cal.Rptr. 804], the plaintiff, a physically disabled man, filed suit against a restaurant alleging it had violated the Civil Code by failing to provide him adequate access. Among other things, the plaintiff sought an injunction under section 55 barring the restaurant from continuing its violation in the future. While the suit was pending, the restaurant became insolvent and closed. The trial court ruled the restaurant was the prevailing party on the injunction and awarded it attorney fees. The plaintiff appealed the award and the appellate court reversed: “In the instant case [the plaintiff] filed his section 55 cause of action in order to enjoin [the restaurant’s] operation in violation of the pertinent statutes and administrative code provisions. The cessation of … operation of the restaurant achieved that result. Under these circumstances, it was an abuse of discretion for the court to determine that by going out of business and rendering the issue moot, [the restaurant] ‘prevailed’ for purposes of attorney fees. Neither party prevailed for purposes of an award of attorney fees on the cause of action for injunctive relief.” (218 Cal.App.3d at p. 185.)

In Elster v. Friedman (1989) 211 Cal.App.3d 1439 [260 Cal.Rptr. 148], the residents of a duplex sued their noisy neighbors and sought an injunction [1574] barring harassment under Code of Civil Procedure section 527.6. When the matter came to trial, the parties entered into a stipulated judgment wherein each side agreed not to harass the other. The trial court ruled that the plaintiffs had prevailed in the suit and awarded them attorney fees under Code of Civil Procedure section 527.6. The defendants then challenged this award and the appellate court affirmed. After noting the term “prevailing party” as used in that section had not been defined, the Elster court analyzed who had “prevailed” as a practical matter: “At bench, respondents wanted appellants to stop playing their music too loudly, to stop telephoning them in the middle of the night, and generally to leave them alone. Respondents got precisely that from the settlement. It is irrelevant that they were symmetrically bound by the injunction, since nothing in the record even hints that they were anything but the victims in this case. The injunction forbade respondents from doing what they apparently had never done and had no apparent desire to do. To consider this significant would be to elevate form over substance. [¶] We hold that the trial court did not abuse its discretion in concluding that respondents prevailed.” (211 Cal.App.3d at p. 1444.)

[2] Winick, Donald, and Elster all share a common theme. In each case, the court declined to adopt a rigid interpretation of the term “prevailing party” and, instead, analyzed which party had prevailed on a practical level. Donald and Elster further clarify that the trial court must determine who is the prevailing party, and that the court’s ruling should be affirmed on appeal absent an abuse of discretion. We conclude similar rules should apply when determining who the “prevailing party” is under section 1354.

[1b] Applying those rules here, we note that both the judge who conducted the special settlement conference, and the judge who ruled on the attorney fee request concluded there was no prevailing party in this litigation. We see no reason to doubt those rulings. The association voluntarily dismissed its complaint against Robinson as part of a global settlement agreement, not because he succeeded on some procedural issue or otherwise received what he wanted. That dismissal apparently was more the result of Robinson’s obdurate behavior rather than any successful legal strategy. While it might be possible to conjure a scenario where a litigant who refuses to participate in a settlement and then receives a voluntary dismissal without prejudice could be deemed the prevailing party, that is certainly not the case here.

Furthermore, the record before us is inadequate to seriously challenge the trial court’s rulings. While we have copies of the complaint and some of the cross-complaints, and are generally aware of the parties involved, we have no way of measuring the truth of the allegations which were made. [1575] [3] Robinson, as appellant, has the obligation to prove error through an adequate record. (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 418, pp. 415-416.) He has not done so.

III. Disposition

The order is affirmed.

King, J., and Haning, J., concurred.

A petition for a rehearing was denied February 15, 1994, and appellant’s petition for review by the Supreme Court was denied April 13, 1994. Mosk, J., and Kennard, J., were of the opinion that the petition should be granted.

FN 1. Unless otherwise indicated, all subsequent statutory references are to the Civil Code.

FN 2. Section 1354 was recently amended. (See Stats. 1993, ch. 303, § 1.) The language quoted above is now contained in subdivisions (a) and (f).

FN 3. This fact distinguishes the present case from the cases cited by the association. The question in Mackinder v. OSCA Development Co. (1984) 151 Cal.App.3d 728 [198 Cal.Rptr. 864], and in Huntington Landmark Adult Community Assn. v. Ross (1989) 213 Cal.App.3d 1012 [261 Cal.Rptr. 875], was whether attorney fees could be awarded under a fee clause contained in a development’s declaration of restrictions. In both cases, the court concluded that the declarations were contracts within the meaning of section 1717 and applied the rules for awarding attorney fees set forth in that section. (Mackinder v. OSCA Development Co., supra, 151 Cal.App.3d at pp. 738-739; Huntington Landmark Adult Community Assn. v. Ross, supra, 213 Cal.App.3d at pp. 1023-1024.) Here, by contrast, the CC&R’s do not include an attorney fees clause so fees were sought under a statute, section 1354.

Salehi v. Surfside III Condominium Owners Association

(2011) 200 Cal.App.4th 1146

[Attorney’s Fees; Prevailing Party] A HOA is deemed a prevailing party entitled to recover its attorney’s fees where the outcome of the lawsuit results in the HOA realizing its litigation objectives on a practical level.

Procter, Slaughter & Reagan, Slaughter & Reagan, William M Slaughter and Gabriele M. Lashly for Defendant and Appellant and for Defendant and Respondent.
Susan J. Salehi, in pro per., for Plaintiff and Respondent and for Plaintiff and Appellant.

OPINION
YEGAN, J.-

A party contemplating litigation to enforce the covenants, conditions, and restrictions (CC&Rs) of a condominium project should get the “ducks in a row.” That is to say, such party should be ready to go forward procedurally and prove its case substantively. Failure to do so subjects the losing party to an award of attorney fees. Here, a condominium owner, Susan J. Salehi, filed such a suit in propria persona against a condominium association (Association). In defending the suit, Association incurred attorney fees of a quarter million dollars. Based on faulty reasoning, Salehi dismissed eight of the ten causes of action on the eve of trial. She prevailed on no level whatsoever, let alone on a “practical level.” But the trial court denied Association any attorney fees, and Association appealed. We conclude that the denial was an abuse of discretion as a matter of law. Salehi did not realize her “litigation objectives” on these causes of action. Association did realize its “litigation objectives” and was the prevailing party on a “practical level.” It is entitled to attorney fees as mandated by the Legislature. We express no opinion on the amount of attorney fees that should be awarded on remand.

Salehi has filed her own appeal, which we conclude to be without merit. Accordingly, we reverse the order denying attorney fees and affirm in all other respects.

ASSOCIATION’S APPEAL

Factual and Procedural Background

In March 2004 Salehi, a licensed California attorney, purchased a condominium unit in Surfside III (Surfside), “a 309 [unit] condominium/townhome community in 8 buildings covering 15 acres adjacent to the ocean in Port Hueneme.” The community is governed by the CC&Rs which provide that Association “shall have the duty of maintaining, operating and managing the Common Area of the project.” [1151]

In May 2008 Salehi, in propria persona, filed a complaint against Association. The operative pleading alleges 10 causes of action. The gravamen of the complaint is that, in violation of the CC&Rs, Association failed to “appropriately maintain and repair Surfside” and to “maintain an adequate reserve fund for the replacement of the common area facilities.”

The fourth and sixth causes of action alleged negligent misrepresentation and fraud. These two causes of action were based on Association’s alleged failure to disclose Surfside’s physical and financial problems to Salehi before she purchased her condominium unit.

Salehi represented Paul Lewow in a similar Ventura County lawsuit against Association (case no. 56-2008-00313595-CU-BC-VTA). Like Salehi, Lewow had also purchased a condominium unit in Surfside. This matter was tried to the court, which issued a statement of decision on January 8, 2010. The trial court concluded that Lewow had failed to prove his case. Judgment was subsequently entered for Association.

Trial in the instant case was scheduled to begin on January 11, 2010, three days after the issuance of the statement of decision in the Lewow case. On January 4, 2010, Salehi informed Association’s counsel that Mark Rudolph, her expert on construction and building maintenance, had notified her that he had “a serious heart condition which will require surgery to repair.” Because Rudolph’s medical condition rendered him unavailable for trial, Salehi told counsel that she had “decided to dismiss all but the fraud and negligent misrepresentation causes of action without prejudice.” On January 8, 2010, the same day that the statement of decision was issued in the Lewow case, Salehi filed a request to dismiss without prejudice all of the causes of action except the fourth and sixth for negligent misrepresentation and fraud. The court clerk entered the dismissals as requested by Salehi.

On January 11, 2010, Salehi successfully moved to continue the trial on the remaining fourth and sixth causes of action because of Rudolph’s unavailability. She submitted Rudolph’s declaration and a medical report verifying his heart problems. According to Rudolph, on January 4, 2010, he informed Salehi “of the severity of [his] health condition.” Rudolph further declared: “I have very little energy and have been advised to avoid stress, curtail my activities as much as possible, and get as much rest as possible. [¶] . . . I am not able to participate in the trial at this time. I expect that the surgery will be sometime this month and . . . expect between six to eight weeks to recover.” The trial was continued to May 10, 2010.

In February 2010, Association moved to recover its attorney fees of $252,767 incurred in defending against the eight causes of action that Salehi [1152] had voluntarily dismissed. The motion was made pursuant to Civil Code section 1354 (section 1354), subdivision (c), which provides: “In an action to enforce the governing documents” of a common interest development, “the prevailing party shall be awarded reasonable attorney’s fees and costs.” Association claimed that the adverse decision in the Lewow case had motivated Salehi to request the dismissals: “Salehi must have realized that she would lose at her trial as well. In order to cut her losses, Salehi voluntarily dismissed” all of the causes of action except those for negligent misrepresentation and fraud.

In her declaration in opposition to the motion, Salehi explained that she had requested to dismiss only those causes of action as to which Rudolph was an essential witness because she believed that the trial court would not grant a continuance. Since the causes of action would be dismissed without prejudice, she could refile them later after Rudolph had recovered from surgery. At that time, Salehi believed that she would be able to proceed without Rudolph on the remaining negligent misrepresentation and fraud causes of action since they did not concern specific construction problems.

In a minute order, the trial court denied the motion for attorney fees. The court stated that, in rendering its decision, it had been guided by Heather Farms Homeowner’s Assn. v. Robinson (1994) 21 Cal.App.4th 1568 (Heather Farms). Based on Heather Farms, the court determined that Association was not a “prevailing party” for purposes of attorney fees within the meaning of section 1354 because it had not “prevailed on a practical level.” The court rejected Association’s claim “that the dismissal[s] [were] motivated by the adverse decision in the related” Lewow case. The court concluded: “In the final analysis, . . . the dismissal[s] seem[] to be due more to [Salehi’s] inexperience and poor decisions than any implied concession to the merits of [Association’s] case.”

Association is the Prevailing Party

[1] Section 1354 does not define “prevailing party.” It only provides that “the prevailing party shall be awarded reasonable attorney’s fees and costs.” (Id., subd. (c).) “The words ‘shall be [awarded]’ reflect a legislative intent that [the prevailing party] receive attorney fees as a matter of right (and that the trial court is thereforeobligated to award attorney fees) whenever the statutory conditions have been satisfied.” (Hsu v. Abbara (1995) 9 Cal.4th 863, 872.)

Association contends that, pursuant to Code of Civil Procedure section 1032 (section 1032), it was entitled to attorney fees as “costs.” Association relies on two subdivisions of section 1032. Subdivision (b) of section 1032 [1153] provides: “Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.” Subdivision (a)(4) provides: ” ‘Prevailing party’ includes . . . a defendant in whose favor a dismissal is entered. . . .”

[2] “[T]he premise for [Association’s] argument, that a litigant who prevails under the cost statute is necessarily the prevailing party for purposes of attorney fees, has been uniformly rejected by the courts of this state. [Citation.] Furthermore, . . . section 1032, subdivision (a) only defines ‘ “[p]revailing party” ‘ as the term is used ‘in that section.’ It does not purport to define the term for purposes of other statutes.” (Heather Farms, supra, 21 Cal.App.4th at p. 1572; accord, Galvan v. Wolfriver Holding Corp. (2000) 80 Cal.App.4th 1124, 1128-1129 [definition of “prevailing party” in section 1032 inapplicable to Civil Code section 1942.4, subdivision (b)(2), which awards attorney fees to “prevailing party” in action for damages resulting from landlord’s collection of rent for substandard housing]; Gilbert v. National Enquirer, Inc. (1997) 55 Cal.App.4th 1273, 1276 -1277 [section 1032 definition inapplicable to Civil Code section 3344, subdivision (a), which awards attorney fees to “prevailing party” in action for unauthorized use of another’s name, voice, signature, photograph, or likeness].)

In denying Association’s motion for attorney fees, the trial court relied on Heather Farms, supra, 21 Cal.App.4th 1568. There, a homeowners’ association brought an action against a homeowner, Robinson, to enforce the CC&Rs of a residential development. The complaint “spawned a complex series of cross-complaints and subsidiary actions” involving numerous parties. (Id., at p. 1570.) After years of litigation, all of the parties except Robinson signed a settlement agreement. “[T]he settlement nonetheless required the association to dismiss its suit against Robinson ‘without prejudice.’ ” (Ibid.) The judge who negotiated the settlement found that there were no prevailing parties: ” ‘This dismissal is part of an overall complex piece of litigation . . . that’s been resolved by a negotiated settlement. There are no winners. There are no favorable parties in this case.’ ” (Id., at p. 1571.) Robinson subsequently moved to recover his attorney fees pursuant to section 1354. Robinson “maintained that since he had received a dismissal, he was the ‘prevailing party’ . . . .” (Ibid.) The trial “court agreed with the settlement judge and concluded there was no ‘prevailing party’ . . . within the meaning of section 1354.” (Ibid.)

[3] The appellate court upheld the trial court’s ruling. It concluded that, in determining who is the “prevailing party” within the meaning of section 1354, the trial court should analyze “which party . . . prevailed on a practical level.” (Heather Farms, supra, 21 Cal.App.4th at p. 1574.) Applying this [1154] analysis, the appellate court reasoned that there was no prevailing party because the homeowners’ association had dismissed its action against Robinson “as part of a global settlement agreement, not because he succeeded on some procedural issue or otherwise received what he wanted.” (Ibid.)

[4] In Santisas v. Goodin (1998) 17 Cal.4th 599, our Supreme Court implicitly applied the Heather Farms rationale to the award of contractual attorney fees: “[A]ttorney fees should not be awarded automatically to parties in whose favor a voluntary dismissal has been entered. In particular, it seems inaccurate to characterize the defendant as the ‘prevailing party’ if the plaintiff dismissed the action only after obtaining, by means of settlement or otherwise, all or most of the requested relief, or if the plaintiff dismissed for reasons, such as the defendant’s insolvency, that have nothing to do with the probability of success on the merits. . . . If . . . the contract allows the prevailing party to recover attorney fees but does not define ‘prevailing party’ or expressly either authorize or bar recovery of attorney fees in the event an action is dismissed, a court may base its attorney fees decision on a pragmatic definition of the extent to which each party has realized its litigation objectives, whether by judgment, settlement, or otherwise. [Citation.]” (Santisas v. Goodin (1998) 17 Cal.4th 599, 621-622.)

Here, the trial court determined that Association was not the prevailing party for purposes of attorney fees. “We review the trial court’s decision for abuse of discretion. (Heather Farms, supra, 21 Cal.App.4th at p. 1574.) ” ‘[D]iscretion is abused whenever . . . the court exceeds the bounds of reason, all of the circumstances before it being considered.’ [Citation.]” (State Farm Mut. Auto. Ins. Co. v. Superior Court, In and For City and County of San Francisco (1956) 47 Cal.2d 428, 432.) “In deciding whether the trial court abused its discretion, ‘[w]e are . . . bound . . . by the substantial evidence rule. [Citations.] . . . The judgment of the trial court is presumed correct; all intendments and presumptions are indulged to support the judgment; conflicts in the declarations must be resolved in favor of the prevailing party, and the trial court’s resolution of any factual disputes arising from the evidence is conclusive. [Citations.]’ [Citation.] We presume the court found in [Salehi’s] favor on all disputed factual issues. [Citation.]” (Strasbourger Pearson Tulcin Wolff Inc. v. Wiz Technology, Inc. (1999) 69 Cal.App.4th 1399, 1403.)

Thus, we presume that the trial court credited Salehi’s proffered reasons for dismissing without prejudice all of the causes of action except the fourth and sixth. According to Salehi, she requested the dismissals not because Association had prevailed in the Lewow case, but because her construction and building maintenance expert was unavailable. She intended to refile the dismissed causes of action after the expert had recovered from surgery. She [1155] did not dismiss the two causes of action for negligent misrepresentation and fraud because she believed that her expert would not be a necessary witness on those causes of action. Later, when a more experienced attorney advised her that the expert might be necessary for rebuttal, she decided to move for a continuance on the remaining causes of action. We are bound by the trial court’s acceptance of Salehi’s explanation for the dismissals. (See e.g., In re Marriage of Greenberg (2010) 194 Cal.App.4th 1095, 1099.) But that does not mean that Salehi prevails on Association’s appeal.

[5] We must conclude that the trial court abused its discretion as to who was the prevailing party. Its ruling exceeds the “bounds of reason.” We are hard pressed to explain how it reached its conclusion or how the holding of Heather Farms aids Salehi. The record does not suggest that Salehi would have prevailed on the merits. It does not appear that she was ready to go forward procedurally and prove the case substantively. To say that she was, somehow, the prevailing party on a “practical level” or that she realized her “litigation objectives” is to do violence to these legal phrases of art. Association was ready to defend on the merits and cannot be faulted because Salehi dismissed these causes of action.

Heather Farms is readily distinguishable. There, the dismissal was mandated by the terms of a global settlement. Here, the dismissals were based on Salehi’s faulty reasoning. The expert’s unavailability because of illness constituted good cause for a continuance. Salehi recognized that she had good cause for a continuance when, three days after the dismissals, she requested a continuance on the remaining fourth and sixth causes of action because of the expert’s illness. The trial court confirmed the showing of good cause by continuing the trial for four months to May 10, 2010.

When Salehi filed her request for dismissals on January 8, 2010, she should have known that her expert’s unavailability would constitute good cause for a continuance. The trial court would have abused its discretion had it denied a continuance in these circumstances. The expert was an essential witness, and Salehi had learned of his illness only seven days before the trial date. Rule 3.1332(c)(1) of the California Rules of Court provides: “Circumstances that may indicate good cause [for a continuance of the trial] include: . . . The unavailability of an essential lay or expert witness because of death, illness, or other excusable circumstances . . . .”

Instead of moving for a continuance on all of the causes of action, as a competent attorney would have done, Salehi dismissed eight of them. These dismissals were unnecessary because she was entitled to a continuance. The trial court would have abused its discretion had it denied a continuance in these circumstances. [1156]

[6] “In assessing litigation success, Hsu v. Abbara (1995) 9 Cal.4th 863, 877, . . . instructs: ‘[C]ourts should respect substance rather than form, and to this extent should be guided by ‘equitable considerations.’ ” (Castro v. Superior Court (2004) 116 Cal.App.4th 1010, 1019.) Even though Salehi’s dismissals were based on reasons unrelated to “the probability of success on the merits” (Santisas v. Goodin, supra, 17 Cal.4th at p. 621), it is unfair to deprive Association of its reasonable attorney fees. Because of Salehi’s dismissals, Association “realized its litigation objectives.” (Id., at p. 622.) The dismissals were due to Salehi’s faulty reasoning. To shield her from attorney fees liability would reward what the trial court characterized as her “poor decisions.” [7] She should not be able to take advantage of her own fault or wrong. (Civ. Code, § 3517.)

We make one further observation. At no time has Salehi claimed that the trial court should have awaited outcome of the two remaining causes of action before deciding who was the prevailing party “[i]n [the] action.” (§ 1354, subd. (c).) We only point out that prudence may dictate that the trial court postpone ruling on an attorney fees request until all causes of action have been resolved.

SALEHI’S APPEAL

Factual and Procedural Background

Almost four years before the 2008 filing of the instant action (the 2008 action), Salehi filed a separate action (the 2004 action) against Association alleging five causes of action: nuisance, breach of contract, breach of fiduciary duty, negligence, and declaratory relief (Ventura County Case No. Civ.229468). The gravamen of the 2004 action was that, in violation of the CC&Rs, Association had failed to maintain and repair the common area water pipes above Salehi’s unit. As a result of this failure, water had leaked from the pipes into her unit. The leaks had damaged Salehi’s property and had caused the growth of toxic mold. The 2004 complaint alleged that, before Salehi purchased her unit, Association had been “notified of incidents of common area water leakage, and other common area water intrusion in [Salehi’s] unit, and into other units, in the Surfside III complex.”

In August 2005 the parties signed a “Settlement Agreement and Mutual Release” that disposed of the 2004 action. Association agreed to pay Salehi $110,000. The parties agreed to release each other from all claims “which they ever had, may now have or may hereafter have . . . by reason of any act or omission, matter, cause or thing arising out of or connected with the Complaint, or which could have been alleged in the Complaint, including [1157] without limitation, any representation, misrepresentation or omission in connection with any of the above . . . .”

The agreement included an express waiver of the protection afforded by Civil Code section 1542 (section 1542), which provides: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” The agreement set forth section 1542 verbatim and provided: “It is the intention of the Parties hereto that the foregoing general releases shall be effective as a bar to all actions, causes of action, suits, claims or demands of every kind, nature or character whatsoever,known or unknown, suspected or unsuspected, fixed or contingent, referred to above, except those reserved in this Agreement.” (Italics added.) “[T]he parties hereby acknowledge that they are aware that they or their attorneys may hereafter discover claims and facts in addition to or different from those which they now . . . believe to exist with respect to the subject matter of or any part to this release, but that it is nonetheless the intention of the Parties to hereby fully, finally, and forever settle and release any and all disputes and differences, known or unknown, suspected or unsuspected, as to the released matters.” (Italics added.) Thus, in 2005, Association “bought peace” with Salehi for any theoretical claims she may have had.

The 2008 action was filed almost three years after the signing of the Settlement Agreement and Mutual Release. At the time of trial of Salehi’s two remaining causes of action for negligent misrepresentation and fraud, Association made a pretrial motion in limine to exclude “all evidence of the fraud and misrepresentation which occurred prior to the signing [of] the release” in August 2005. Association contended that Salehi “cannot pursue any claims for damages which occurred before August . . . 2005, because she released all known and unknown claims against Association in the Settlement Agreement and Mutual Release.” The granting of the motion in limine would dispose of Salehi’s two remaining causes of action, since they were based on Association’s alleged failure to disclose Surfside’s physical and financial problems to Salehi before she purchased her unit in March 2004.

Salehi argued that the release applied only to known and unknown claims related to the common area plumbing leaks that had damaged her individual condominium unit. Salehi declared that, when she signed the release in August 2005, she “did not, and could not know that there was a complex-wide failure of the plumbing system and essentially every other major component of the common areas.” In her complaint in the 2008 action, Salehi alleged that Association had failed “to maintain, upkeep, and adequately repair the common areas, including but not limited to the drainage and [1158] sewage systems, the fresh water plumbing, the security gates, the roofs, the building exteriors and stairways, the elevators, the carports, the utility buildings, the subflooring,[] railings, balconies, patios, sidewalks, asphalt roadways, [and] lighting . . . .”

The trial court granted the motion in limine and entered judgment in favor of Association. Association filed a memorandum of costs in the amount of $7,056. The trial court denied Salehi’s motion to tax costs.

Non-Preclusive Effect of Order Denying Summary Adjudication of Issues

Before Association’s motion in limine, a different judge had denied its motion for summary adjudication on the issue of whether the 2005 release barred Salehi’s claims in the 2008 action. Salehi argues that, by granting the motion in limine, the trial court in effect reversed this earlier ruling without complying with Code of Civil Procedure section 1008, which limits a court’s jurisdiction to grant an application to reconsider its prior order.

[8] Salehi “has cited no case, and we know of none, suggesting that section 1008 bars the judge to whom a case is assigned for trial from ruling on an issue of law as to which another judge has previously denied summary adjudication. To read the statute that broadly would be a prescription for calcified and pointless trial proceedings grinding inexorably toward reversal on appeal for errors that could easily have been corrected but for a perceived lack of power to do so.” (Schmidlin v. City of Palo Alto (2007) 157 Cal.App.4th 728, 766.) “The non-preclusive effect of denial is explicitly recognized in the directive that a grant of summary adjudication as to some issues ‘shall not operate to bar’ relitigation of other issues ‘as to which summary adjudication was either not sought or denied.’ (Code Civ. Proc., § 437c, subdivision (n)(2).)” (Id., at p. 766, fn. 18.)

Evidence on the Issue of Claimed Ambiguity Of the 2005 Settlement Agreement

Salehi contends that the trial court erroneously “refused to allow [her] to present evidence concerning [her] intent in entering into the [2005] agreement.” We disagree. In support of her contention, Salehi cites page 95 of the reporter’s transcript of the hearing on the motion in limine. But this citation does not support her contention. At page 95 of the reporter’s transcript, Salehi asked the court to “find that [the 2005 release] is ambiguous and accept extrinsic evidence.” The court replied that it “could take evidence on the issue as to whether or not it’s ambiguous.” Salehi responded: “The [1159] evidence is what I’ve cited in the opposing papers, that the language that is in the recitals limits it. It explains, it shows the intent of why I signed the settlement agreement.”

[9] The trial court properly permitted Salehi to present extrinsic evidence as to whether the 2005 agreement was ambiguous. “[P]arol evidence is properly admitted to construe a written instrument when its language is ambiguous. . . . [¶] The decision whether to admit parol evidence involves a two-step process. First, the court provisionally receives (without actually admitting) all credible evidence concerning the parties’ intentions to determine ‘ambiguity,’ i.e., whether the language is ‘reasonably susceptible’ to the interpretation urged by a party. If in light of the extrinsic evidence the court decides the language is ‘reasonably susceptible’ to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step – interpreting the contract. [Citation.]” (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.)

[10] Although Salehi told the court that her opposition to the motion in limine contained the relevant extrinsic evidence concerning her intent, it in fact contained no competent extrinsic evidence. Salehi declared, “I never intended to settle any claims other than for the specific repairs stated in the settlement agreement . . . .” Salehi did not indicate whether she had communicated this intent to Association. “[E]vidence of the undisclosed subjective intent of the parties is irrelevant to determining the meaning of contractual language.” (Winet v. Price, supra, 4 Cal.App.4th 1166, fn. 3.) “It is the outward expression of the agreement, rather than a party’s unexpressed intention, which the court will enforce. [Citation.]” (Id., at p. 1166.)

2005 Settlement Bars 2008 Claims

[11] Salehi asserts that the trial court should have let the jury determine whether the parties intended the 2005 release to encompass her claims in the 2008 action for negligent misrepresentation and fraud. Because there was no conflicting competent extrinsic evidence as to the parties’ intent, the interpretation of the release was a question of law for the court, not a question of fact for the jury. (City of Hope Nat. Medical Center v. Genentech Inc. (2008) 43 Cal.4th 375, 395; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865.)

We “independently construe the writing to determine whether the release encompasses the present claim[s]” for negligent misrepresentation and fraud. (Winet v. Price, supra, 4 Cal.App.4th at p. 1166.) We conclude that the 2005 release bars the remaining two 2008 claims. [1160]

In Winet v. Price, supra, 4 Cal.App.4th 1159, the appellate court interpreted a release with similar language. Price was an attorney who performed services for Winet. Price sued Winet to recover legal fees, and the parties settled the matter. As part of the settlement, the parties released each other from all claims, whether known or unknown. Each party was represented by counsel during the negotiation of the release. Fifteen years later, Winet was sued concerning a partnership agreement that Price had drafted before the settlement agreement was signed. Winet cross-complained against Price, alleging that Price had committed malpractice in drafting the partnership agreement. Price moved for summary judgment, arguing that the release encompassed the malpractice claim. The trial court granted the motion.

[12] The appellate court upheld the trial court’s ruling. In determining “that the release was designed to extinguish all claims extant among the parties,” whether known or unknown, the appellate court considered the following factors: “First, Winet was represented by counsel and was aware at the time he entered into the release of possible malpractice claims against Price relating to certain services Price had rendered to him [but not relating to the drafting of the partnership agreement]. With this knowledge and the advice of counsel concerning the language of (and the import of waiving) section 1542, Winet expressly assumed the risk of unknown claims. Second, it is significant that the parties were able to, and did, fashion language memorializing their agreement to preserve identified claims from the operation of the release when such was their intention . . . . Finally, Winet was represented by his own counsel, who explained to Winet the import of the release in general and of the waiver of section 1542 in particular. Under these circumstances we may not give credence to a claim that a party did not intend clear and direct language to be effective. [Citation.]” (Winet v. Price, supra, 4 Cal.App.4th at p. 1168, fn. omitted.)

The rule and rationale of Winet apply here. Like Winet, Salehi was also represented by counsel during the negotiation of the release. In the absence of evidence to the contrary, we presume that counsel explained to Salehi “the import of the release in general and of the waiver of section 1542 in particular.” (Winet v. Price, supra, 4 Cal.App.4th at p. 1168.) The settlement agreement states: “THE PARTIES ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY LEGAL COUNSEL AND ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE § 1542 . . . .” Moreover, because Salehi was an attorney in her own right, she should have understood the import of the section 1542 waiver.

When Salehi signed the release in August 2005, she was aware of possible claims against Association in addition to the water leakage claims pertaining to her own unit. In a letter to Association months before the signing of the [1161] release, Salehi stated that Dura-Flo, a plumbing contractor, had estimated it would cost “over $1.2 million to line all of the copper pipes only.” Salehi inquired, “Which is correct: We have few plumbing problems or we have such extensive problems that we need a $1.2 million fix?” Salehi asked Association to “provide details to support [its] response including any inspection or estimate to repair the drains.” So, Salehi knew, or should have known, of additional theoretical claims. Despite this knowledge, she “expressly assumed the risk of unknown claims.” (Winet v. Prince, supra, 4 Cal.App.4th at p. 1168.)

Finally, “it is significant that the parties were able to, and did, fashion language memorializing their agreement to preserve identified claims from the operation of the release when such was their intention . . . .” (Winet v. Price, supra, 4 Cal.App.4th at p. 1168.) For example, the release expressly did not apply to Salehi’s “obligation to pay Homeowner Association dues and assessments” or to “any obligations or restraining orders created by virtue of Ventura County Superior Court Case Number CIV229468 [the 2004 action].”

Accordingly, we reject Salehi’s argument that the 2005 release did not apply to unknown claims against Association that arose prior to the release. “If an argument such as this were given currency, a release could never effectively encompass unknown claims. A releasor would simply argue that release of unknown or unsuspected claims applied only to known or suspected claims, making it ineffective as to unknown or unsuspected claims.” (Winet v. Price, supra, 4 Cal.App.4th at p. 1167.)

Denial of Motion to Tax Costs

Salehi contends that the trial court abused its discretion in denying her motion to tax costs because “the costs which [she] sought to have taxed were incurred in defending the dismissed causes of action and were not reasonable or necessary for trial of the two remaining causes of action.” Salehi’s contention is without merit. Association sought costs pursuant to the costs statute, section 1032. Association was entitled to costs on the dismissed causes of action pursuant to subdivision (a)(2) of section 1032, which provides, ” ‘Prevailing party’ includes . . . a defendant in whose favor a dismissal is entered . . . .”

[13] Moreover, Salehi has forfeited the contention that costs “were not reasonable or necessary” as to the two remaining causes of action because she failed to provide supporting legal argument with references to the record. “[T]he trial court’s judgment is presumed to be correct, and the appellant has the burden to prove otherwise by presenting legal authority on each point [1162] made and factual analysis, supported by appropriate citations to the material facts in the record; otherwise, the argument may be deemed forfeited. [Citations.]” (Keyes v. Bowen (2010) 189 Cal.App.4th 647, 655-656.) “The appellant may not simply incorporate by reference arguments made in papers filed in the trial court, rather than brief them on appeal. [Citation.]” (Id., at p. 656.)

CONCLUSION

The order denying Association’s motion for attorney fees is reversed, and the matter is remanded to the trial court for determination and award of reasonable attorney fees to Association. The judgment as to causes of action four and six and the post -judgment order denying Salehi’s motion to tax costs are affirmed. Association shall recover its costs on both appeals.

Gilbert, P.J., and Perren, J., concurred.

Smith v. Laguna Sur Villas Community Association

(2000) 79 Cal.App.4th 639

[Association Records; Attorney-Client Privilege] A HOA, the corporate entity, is entitled to claim attorney-client privilege for communications between the HOA and its attorneys. The HOA’s members are not the holders of the privilege; rather, the HOA’s Board of Directors is the holder of the privilege.

Lee H. Durst and Nancy M. Padberg for Plaintiffs and Appellants.
Richard A. Tinnelly, Bruce R. Kermott, Aliso Viejo, and Deborah Cameron Vian for Defendant and Respondent.

OPINION

CROSBY, J.

Condominium associations may bring construction defect lawsuits against developers without fear of having to disclose privileged information to individual homeowners. Like closely-held corporations and private trusts, the client is the entity that retained the attorney to act on its behalf.

This litigation has its genesis in a construction defect action involving a 253-unit condominium project in the Laguna Sur development of the City of Laguna Niguel. The project was governed by the Laguna Sur Villas Community Association (Villas). Another group, the Laguna Sur Community Association (the Master Association), owned the development’s open space.^{[FN. 1]}

In June 1990, both associations jointly retained the law firm of Duke, Gerstel, Shearer & Bregante to sue the developer. They split the legal fees and shared expenses for soils and structural experts.

The litigation proved to be more costly than anticipated and by August 1991 the fees exceeded $450,000. That fall the Villas’ board of directors adopted an emergency assessment of $2,000 per unit. The assessment was imposed without polling the members.

A dissident group of Villas residents was upset by the “runaway budget for expenditures” and demanded to review Duke, Gerstel’s work product and legal bills “within 15 days from their receipt by the Association or its representatives.” Villas objected on the grounds of attorney-client and work product privileges.

Plaintiff Leslie Smith also made the same demand to Villas in his capacity as a board member. However, Smith served as a director of the Master Association, not Villas. He voluntarily resigned from the Master Association in June 1992.^{[FN. 2]}

The dissidents sought to recall the Villas board members for fiscal mismanagement, but lost the recall vote. The Villas board thereafter recommended an additional special assessment of $4,000 per unit. This [323] new assessment was ratified by a membership vote in 1993.

The dissidents responded with individual small claims actions against the Villas’ directors to recover the amount of the 1991 and 1992 assessments. They separately sued Villas in superior court for declaratory and injunctive relief. Villas in turn sued them for abuse of process and declaratory relief. The actions were consolidated.

After trial, the court found the 1991 special assessment was valid; Villas held the attorney-client privilege; and Smith’s inspection rights as a director were moot. Villas dismissed its damage claim for abuse of process. The court awarded attorney fees and costs to Villas as the prevailing party pursuant to Code of Civil Procedure section 1033.5 and Civil Code sections 1717 and 1354.

The court correctly held Villas was the holder of the attorney-client privilege and that individual homeowners could not demand the production of privileged documents, except as allowed by the Villas board.

Villas brought the construction defect litigation on its own behalf. California law expressly permits a mutual benefit non-profit corporation to “institute, defend, settle, or intervene in litigation … in its own name as the real party in interest and without joining with it the individual owners” in actions for damage to the common areas or for separate areas which it must repair or maintain. (Code Civ. Proc., § 383.) This represents a substantive change in previous case law which only accorded individual owners standing to sue. (Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal. App.3d 783, 792, 171 Cal.Rptr. 334.)^{[FN. 3]}

Corporations have a separate legal identity and enjoy the benefit of the attorney-client privilege. (Hoiles v. Superior Court (1984) 157 Cal.App.3d 1192, 1198, 204 Cal.Rptr. 111.) Evidence Code section 951 defines a “client” as the “person” who “directly or through an authorized representative, consults a lawyer for the purpose of retaining the lawyer….” The term “person” includes a corporation (Evid.Code, § 175); indeed, it may extend to an unincorporated organization “when the organization (rather than its individual members) is the client.” (Cal. Law Revision Com. com, 29B Pt. 3 West’s Ann. Evid.Code (1995 ed.) foll., § 951, p. 207.) There is no statutory exception for shareholders, even for closely held entities, and courts are powerless to elaborate upon the legislative scheme. (Dickerson v. Superior Court (1982) 135 Cal.App.3d 93, 99, 185 Cal.Rptr. 97.)

Although appellants, as condominium owners, were members of Villas, they were not individually named as plaintiffs in the construction defect litigation. Because they did not consult with or retain the Duke, Gerstel law firm, they do not fit within the joint-client exception of Evidence Code section 962. (Hoiles v. Superior Court, supra, 157 Cal.App.3d at p. 1199, fn. 4, 204 Cal.Rptr. 111; see also Wells Fargo Bank v. Superior Court (2000) 22 Cal.4th 201, 212, 91 Cal.Rptr.2d [324] 716, 990 P.2d 591[“no such [joint client] relationship is implied in law”].)

Appellants argue they were the “true clients” of Duke, Gerstel rather than Villas, a “faceless” association which could only act in a “representative” capacity of the general membership. They contend Villas owed them a fiduciary duty to act in their best interests as “the rightful owners who are paying with their assessments for the legal services being rendered on their behalf.” They characterize as the “crux” of the matter the question: “For whose benefit is the lawsuit being brought?”

We have squarely rejected this equation between beneficiaries and allegedly true clients. In Holies v. Superior Court, supra, 157 Cal.App.3d 1192, 204 Cal.Rptr. 111, we held that only closely-held corporations, not minority shareholders, were the client of the corporation’s attorney even though the corporate board members owed fiduciary duties to the complaining shareholders. In Shannon v. Superior Court (1990) 217 Cal.App.3d 986, 266 Cal. Rptr. 242, another court held a receiver could assert an absolute attorney-client privilege as to communications with his counsel even as to a disclosure request by the corporation which was placed into receivership and to which he owed fiduciary responsibilities.

Most recently, in Wells Fargo Bank v. Superior Court, supra, 22 Cal.4th 201, 209, 91 Cal.Rptr.2d 716, 990 P.2d 591, the Supreme Court refused to create a so-called “fiduciary” exception to the attorney-client privilege because courts “do not enjoy the freedom to restrict California’s statutory attorney-client privilege based on notions of policy or ad hoc justification.” In Wells Fargo the beneficiaries of a trust sought to discover confidential communications between the trustee (a bank) and outside trust counsel. Like appellants, the beneficiaries contended the trustees owed independent duties to provide them with complete and accurate information regarding the trust administration and to allow them to inspect books and documents. All to no avail, for the court declined to allow such responsibilities to trump the statutorily-created attorney-client privilege: “Certainly a trustee can keep beneficiaries `reasonably informed’ [citation] and provide `a report of information’ [citation] without necessarily having to disclose privileged communications…. If the Legislature had intended to restrict a privilege of this importance, it would likely have declared that intention unmistakably, rather than leaving it to courts to find the restriction by inference and guesswork….” (Id. at p. 207, 91 Cal.Rptr.2d 716, 990 P.2d 591.) Wells Fargo held that the attorneys only represented the trustees, not the beneficiaries.

The Supreme Court was not persuaded to the contrary because the beneficiaries were indirectly paying attorney fees which came out of the trust. That is because “[p]ayment of fees does not determine ownership of the attorney-client privilege…. In any event, the assumption that payment of legal fees by the trust is equivalent to direct payments by beneficiaries is of dubious validity…. [T]his question of cost allocation does not affect ownership of the attorney-client privilege.” (Wells Fargo Bank v. Superior Court, supra, 22 Cal.4th at p. 213, 91 Cal.Rptr.2d 716, 990 P.2d 591.)

Here, too, appellants did not individually arrange to pay their proportionate fees of the Duke, Gerstel legal fees; instead, the fees were billed to and paid by Villas, which drew its funds from the member assessments. As in Wells Fargo, such indirect payments do not suffice to create an attorney-client relationship.

It is no secret that crowds cannot keep them. Unlike directors, the residents owed no fiduciary duties to one another and may have been willing to waive or breach the attorney-client privilege for reasons unrelated to the best interests of the association. Some residents may have had no defects in their units or may have had familial, personal or professional relationships with the defendants. Indeed, it [325] is likely that the developer in the underlying litigation itself may have owned one or more unsold units within the complex. As Villas points out, “[o]ne can only imagine the sleepless nights an attorney and the Board of Directors may incur if privileged information is placed in the hands of hundreds of homeowners who may not all have the same goals in mind.” With the privilege restricted to an association’s board of directors, this is one worry, at least, that their lawyers can put to rest.

III

As an alternative to their rights as homeowners, appellants argue that Smith and another individual, Hunter Wilson, were entitled to copies of the billing documents in the construction defect litigation in their separate capacity as directors and that their written demands to view the “attorney bills, reports and documents” were ignored.

We provided a “short answer” to a similar claim in Hoiles v. Superior Court., supra,157 Cal.App.3d at p. 1201, 204 Cal. Rptr. 111. We do so again. No such claim is contained in the complaint. Appellants’ contention is meritorious in the abstract since directors do have the right to request privileged information in their capacity as fiduciaries. However, it is specious in the particular. Neither Smith nor Wilson was a director of the association they sued. They were directors of the Master Association, not Villas. As counsel pointed out to the court: “Mr. Smith is trying to seek … rights of inspection by suing Laguna Sur Villas. It is a separate and distinct corporation which he never sat on as a director….”^{[FN. 4]}

Appellants make a meritless argument that the two associations “operated as one in the … construction defect litigation” and shared legal expenses. That is a nonsequitur. There was no attempt to establish that the two associations were alter egos of one another, and each maintained a separate legal existence.

Moreover, as the trial court observed, Smith’s rights (if any) as a director of either association ceased when his term expired in 1992. In Chantiles v. Lake Forest II Master Homeowners Assn. (1995) 37 Cal.App.4th 914, 920, 45 Cal. Rptr.2d 1, we acknowledged the rule that “`the right of a director [of a nonprofit corporation] to inspect the books and records of the corporation ceases on his removal as a director, by whatever lawful means[.]'” This issue was thus moot even before the time of trial, and Smith had no reason to pursue it here.

Appellants question the 1991 emergency assessment because “there was no emergency….” The court, however, ruled that appellants had failed to prove this contention “without the actual documentation” that Villas had adequate cash reserves to pay for consultants and repairs to the damaged common property.

That failure of proof manifests itself here as well. If there is a legal argument disguised somewhere in appellants’ briefs, it is too well hidden for us. Appellants have not affirmatively established error to overcome the presumption in favor of the ruling below. (Fundamental Investment etc. Realty Fund v. Gradow (1994) 28 Cal. App.4th 966, 971, 33 Cal.Rptr.2d 812.)

The judgment, including the fee award to respondent as prevailing party, is affirmed. Costs on appeal, including reasonable attorney fees to be assessed by the superior court, are awarded to respondent.

SILLS, P.J., and RYLAARSDAM, J., concur.

FN. 1 – The two boards had two or three common members and occasionally met collectively for informal workshops, but otherwise maintained a separate legal existence.

FN. 2 – Smith erroneously pleaded that he was a Villas director in 1991 and 1992. He never sued the Master Association.

FN. 3 – Smith raises for the first time in his reply brief the purported impact of recent legislation (Civ.Code, § 1375, subd. (g)) requiring associations to provide notice to individual owners of rejected settlement offers by builders or of proposed civil actions by the association and to allow for a special meeting of the members to discuss the matter. Aside from the impropriety of raising issues for the first time by reply brief (City of Costa Mesa v. Connell(1999) 74 Cal.App.4th 188, 197, 87 Cal.Rptr.2d 612), we fail to see the statute’s relevance. Under the statute, for example, the notice requirements do not come into play when an association’s board of directors accepts a developer’s written settlement offer, or where it agrees to submit to alternative dispute resolution after meeting and conferring with the developer. (Civ.Code, § 1375, subds. (e)(3), (g) [“If the board of directors of the association rejects a settlement offer presented at the meeting …”].)

FN. 4 – Appellants also tell us that “Abel Armas” was a board member of the Villas Association and that he, too, futilely made inspection requests of his fellow Villas board members. But Armas is not a party to the instant lawsuit, and there is no record he made any requests for documents.

AB 2420 (Jones). Debt Collection: Attorneys: Exemption.

Would exempt “law firms” from the definition of a “debt collector” subject to the requirements and regulations of the California Rosenthal Fair Debt Collection Practices Act.

Current Status: Dead

FindHOALaw Quick Summary:

The “Rosenthal Fair Debt Collection Practices Act” (the “Act”) defines and regulates the activities of “debt collectors.” The Act, at currently exempts “an attorney or counselor at law” from the definition of a “debt collector.” (Civ. Code § 1188.2(b).)

AB 2420 (Jones) would amend this exemption so that it also exempts a “law firm” from the definition of a “debt collector.” A “law firm” would be defined as “two or more attorneys whose activities constitute the practice of law and who share in the profits, expenses and liabilities of the firm or a law corporation which employs more than one lawyer.”

View more info on AB 2420
from the California Legislature's website

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All posts by Steve Tinnelly

Cobb v. Ironwood Country Club

OPINION

FACTS

DISCUSSION

1. Ironwood’s Power to Amend

2. Retroactivity

3. Public Policy

DISPOSITION

Palm Springs Villas II HOA v. Parth

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SB 814 (Hill). Drought: Excessive Water Use: Urban Retail Suppliers.

Current Status: Chaptered

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Heather Farms Homeowners Association v. Robinson

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Salehi v. Surfside III Condominium Owners Association

Smith v. Laguna Sur Villas Community Association

AB 2420 (Jones). Debt Collection: Attorneys: Exemption.

Current Status: Dead

FindHOALaw Quick Summary:

Civil Code Section 1188.2. Rosenthal Fair Debt Collection Practices Act; Definitions.

Notice to Members of Civil Action Against Developer

AB 1963 (Calderon). Common Interest Developments: Construction Defects.

Current Status: Chaptered

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