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Park Place Estates Homeowners Association v. Naber

(1994) 29 Cal.App.4th 427

[Assessments & Collection; Duty to Pay Assessments] An association member may not assert the homeowners association’s (HOA’s) conduct as a defense or “setoff” to an action brought by the HOA against the member for the member’s failure to pay assessments.

William C. Mathews for Defendant and Appellant. Dunbar & Massie, Jonathan D. Massie, Ault, Deuprey, Jones & Gorman, Manuel L. Ramirez and Keren L. Azoulay for Plaintiffs and Respondents.

OPINION

NARES, J.

Defendant and cross-complainant Ike Naber owns a condominium unit in a property development managed by plaintiff and cross-defendant Park Place Estates Homeowners Association, Inc. (Association). After Naber refused to permit the Association to conduct repairs in his unit, the Association filed suit and obtained preliminary injunctive relief. Naber later cross-complained, alleging the Association negligently performed the repairs. The Association amended its complaint, seeking to foreclose on an assessment lien and requesting damages for Naber’s interference with the repair work.

The jury awarded the Association $6,500 on its damage claim. The court ruled in the Association’s favor on its equitable foreclosure action and entered a judgment of nonsuit on Naber’s cross-complaint. The court awarded the Association $47,403.05 for attorney fees incurred in its affirmative case and $18,053 for attorney fees and costs incurred in defending against Naber’s cross-complaint.

Naber appeals. For the reasons stated in the unpublished portion of this opinion, we reverse the judgment of nonsuit on Naber’s cross-complaint and strike the $18,053 cost award. We remand for a limited retrial on Naber’s property damage claim based on the Association’s repair work conducted between February 1991 through April 1991. In all other respects we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Naber purchased his condominium subject to the Association’s “Declaration of Covenants, Conditions and Restrictions” (CC&R’s). On January 14,[29 Cal.App.4th 430]1991, the Association filed suit against Naber, seeking declaratory and injunctive relief and alleging that Naber violated the CC&R’s by refusing to allow the Association to repair his condominium unit. fn. 2The court issued a preliminary injunction ordering Naber to vacate his condominium unit within 24 hours and to refrain from any activities which would disrupt the Association’s efforts to facilitate the repairs. The court also ordered the Association to pay Naber $3,000 to “defra[y] his relocation costs” and to post a $2,000 bond.fn. 3 The Association performed the repairs between February and April 1991.

Two months later, on June 17, 1991, Naber filed a cross-complaint against the Association alleging the Association committed wrongful acts when it performed the repair work. fn. 4 In August 1991, the Association answered and filed an amended complaint adding allegations that Naber owed the Association $5,946.25 in unpaid monthly assessments and seeking to judicially foreclose on a lien imposed for the unpaid assessments. Two days before the discovery cutoff date, Naber moved for leave to file a second amended cross-complaint. The court denied the motion. The court, however, allowed the Association to amend its complaint to include a damage claim based on Naber’s refusal to permit the repair work.

Trial began on March 10, 1992. Before jury selection the court granted several of the Association’s motions in limine and ruled in favor of the Association on its equitable cause of action for foreclosure of the assessment lien. After Naber had the opportunity to present his evidence to the jury, the court granted the Association’s motion for nonsuit as to all causes of action in Naber’s cross-complaint on the ground Naber failed to present facts to support his causes of action. Following closing arguments, the jury found in the Association’s favor on its damage claim and awarded it $6,500.

DISCUSSION

I. The Association’s Complaint

The Association alleged Naber had failed to pay monthly assessment fees as required by the governing CC&R’s. [1a] Before trial the Association [29 Cal.App.4th 431] moved to exclude any evidence that Naber was entitled to withhold or “set off” his assessment obligation because the Association failed to maintain common area elements. The court granted the motion. Naber contends the court’s ruling was erroneous.

Naber does not argue a condominium owner is excused from paying assessments if the association fails to perform its obligations under the CC&R’s.fn. 5Instead, Naber argues he should have been permitted to introduce evidence of the Association’s prior CC&R violations based on Code of Civil Procedure section 431.70, allowing an opposing party to assert its own affirmative claim in defense where “cross-demands for money” exist between the parties.fn. 6 [2] As our Supreme Court has recognized, however, this statutory setoff right is not absolute and can be limited when the assertion of such right would defeat public policy protecting the debtor. (See Jess v. Herrmann (1979) 26 Cal.3d 131, 142-143 [161 Cal.Rptr. 87, 604 P.2d 208], quoting Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 367-368 & fn. 24 [113 Cal.Rptr. 449, 521 P.2d 441, 65 A.L.R.3d 1266] [“In light of th[e] equitable origin [of Code of Civil Procedure section 431.70], numerous California decisions have recognized that ‘the … right to setoff … may be restricted by judicial limitations imposed to uphold [independent] state policy.’ “].)

The Legislature has enacted very specific procedural rules governing condominium assessments. (See Civ. Code, §§ 1366, 1367.) Condominium [29 Cal.App.4th 432] homeowners associations must assess fees on the individual owners in order to maintain the complexes. (Civ. Code, § 1366, subd. (a).) The assessment “shall be a debt of the owner … at the time the assessment … [is] levied.” (Civ. Code, § 1367, subd. (a).) When an owner defaults, the association may file a lien on the owner’s interest for the amount of the fees. (Civ. Code, § 1367, subd. (b).) If the default is not corrected, the association may pursue any remedy permitted by law, including judicial foreclosure or foreclosure by private power of sale.fn. 7 (Civ. Code, § 1367, subd. (d).)

[1b]These statutory provisions reflect the Legislature’s recognition of the importance of assessments to the proper functioning of condominiums in this state. Because homeowners associations would cease to exist without regular payment of assessment fees, the Legislature has created procedures for associations to quickly and efficiently seek relief against a nonpaying owner. Permitting an owner to broadly assert the homeowners association’s conduct as a defense or “setoff” to such enforcement action would seriously undermine these rules. (See also Baker v. Monga (1992) 32 Mass.App. 450, fn. 8 [590 N.E.2d 1162, 1164] [“The independent nature of the covenant to pay in timely fashion common charges to the condominium unit owner’s organization is implicit in the contractual agreement of the association’s members that maintenance charges and other proper assessments are necessary to the sound ongoing financial management and stability of the entire complex.”].)

Significantly, Naber concedes he had no right to withhold assessments based on the Association’s alleged wrongful conduct. Although neither the statutes nor the CC&R’s expressly preclude an owner from claiming a Code of Civil Procedure section 431.70 setoff under the circumstances here, such prohibition can be reasonably implied from the purposes underlying the statutory scheme and the CC&R provisions. The court did not err in excluding evidence of the Association’s prior conduct as a defense to the assessment action. fn. 8 [29 Cal.App.4th 433]

We reject Naber’s additional argument that the court erred in refusing to permit evidence of the Association’s prior CC&R violations as a setoff to the Association’s “quantum meruit” claim. There is no evidence in the record that Naber was precluded from raising this defense to the Association’s quantum meruit claim. Equally significant, because there is no showing in the record that the court found in the Association’s favor on the quantum meruit cause of action, any exclusion of evidence relevant to such claim could not have affected the judgment and therefore was not prejudicial.

[3] Naber additionally contends the court erred in precluding him from proffering evidence of the Association’s “unclean hands,” including facts showing the Association’s “pattern of harassment” and “breaches of the … CC&R’s.” Naber, however, never pled an “unclean hands” defense as an affirmative defense, nor did he assert at trial that such evidence was relevant to his equitable defenses. Moreover, because Naber failed to include a trial transcript as part of the appellate record, there is no support for his contention the court’s ruling could have reasonably affected the outcome of the case. Because an appellant must affirmatively show error by an adequate record, ” ‘ “[a]ll intendments and presumptions are indulged to support [the judgment] on matters as to which the record is silent ….” [Citations.]’ ” (Null v. City of Los Angeles (1988) 206 Cal.App.3d 1528, 1532 [254 Cal.Rptr. 492], quoting Kearl v. Board of Medical Quality Assurance (1986) 189 Cal.App.3d 1040, 1051 [236 Cal.Rptr. 526], quoting Rossiter v. Benoit (1979) 88 Cal.App.3d 706, 712 [152 Cal.Rptr. 65].) Naber failed to establish prejudicial error.

II, III. fn.***

Disposition

We reverse the judgment of nonsuit on Naber’s cross-complaint and strike the $18,053 costs award. We remand for a limited retrial on Naber’s property damage claim based on the Association’s repair work conducted [29 Cal.App.4th 434] between February 1991 through April 1991. In all other respects, we affirm the judgment. Each party to bear own costs on appeal. Benke, Acting P. J., and Miller, J., fn. *concurred.

FN 1. Pursuant to California Rules of Court, rule 976.1, this opinion is certified for publication with the exception of parts II and III.

FN 2. The repairs involved a form of “regrouting” work. Because Naber failed to include the trial transcript in the appellate record, the record is unclear as to the reason for the repairs or the precise nature of the repairs.

FN 3. The court further ordered the parties to appear on February 29, 1991, “to determine whether there were any damages caused by [Naber’s] moving.”

FN 4. The four causes of action included wrongful eviction, conversion, trespass and negligent infliction of emotional distress.

FN 5. While this issue has never been addressed in a reported decision in California, courts in other states have refused to permit an owner to withhold payment of lawfully assessed common area charges by asserting an offset right against those charges. These courts have emphasized the importance of assessment fees to condominium management and the absence of legislative authorization for an offset. (Trustees of Prince Condo. Tr. v. Prosser (1992) 412 Mass. 723 [592 N.E.2d 1301, 1302][“A system that would tolerate a [condominium] owner’s refusal to pay an assessment because the unit owner asserts a grievance … would threaten the financial integrity of the entire condominium operation.”]; see also, Rivers Edge Condominium Ass’n v. Rere, Inc. (1990) 390 Pa.Super. 196 [568 A.2d 261, 263]; Newport West Condominium Ass’n v. Veniar (1984) 134 Mich.App. 1 [350 N.W.2d 818, 822-823]; accord, Advising California Condominium & Homeowners Associations (Cont.Ed.Bar 1991) § 6.43, pp. 295-296.)

FN 6. Code of Civil Procedure section 431.70 provides in relevant part: “Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the person’s claim would at the time of filing the answer be barred by the statute of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this section shall not exceed the value of the relief granted to the other party.”

FN 7. The CC&R’s contain parallel provisions as to the procedures for imposing monthly assessments and remedies for nonpayment of such assessments. These provisions state the purpose of the assessment “is to promote the recreation, health, safety, and welfare of the residents in the Project and for the improvement and maintenance of the Common Area for the common good of the project.” Pursuant to the CC&R’s, an assessment is a personal obligation of the owner on the date the assessment falls due.

FN 8. Our determination that Code of Civil Procedure section 431.70 did not give Naber an independent right to assert the Association’s alleged wrongful conduct as a defense does not mean a condominium owner is without a remedy for a homeowner’s association’s violations of the CC&R’s. An owner’s remedy consists of legal action against the association and not the withholding of fees. (See Spitser v. Kentwood Home Guardians (1972) 24 Cal.App.3d 215 [100 Cal.Rptr. 798] [homeowners challenging an assessment by bringing an action for declaratory and injunctive relief].)

FN *. See footnote 1, ante, page 427.

FN **. Judge of the San Diego Superior Court sitting under Assignment by the Chairperson of the Judicial Council.

Limitations on Assessment Increases

An association’s duty to levy assessments sufficient to perform its obligations may require the association’s board to increase the level of regular assessments or to levy one or more special assessments. Notwithstanding more restrictive limitations placed on the board’s ability to do so by the governing documents, the board may take the following actions without membership approval (Civ. Code § 5605(b).):

Increase Regular Assessments up to 20% – Impose a regular assessment up to twenty percent (20%) greater than the regular assessment for the association’s preceding fiscal year; and/or
Impose a Special Assessment up to 5% – Impose special assessments up to five percent (5%) (aggregate) of the budgeted gross expenses of the association for that fiscal year.

Exception: Emergency Assessments
These limitations do not serve to limit “assessment increases necessary for emergency situations.” (Civ. Code § 5610; See also “Emergency Assessments.”)

Notice Requirement
An association is required to provide its members with individual notice of any increase in the regular or special assessments not less than thirty (30) days nor more than sixty (60) days prior to the increased assessment becoming due. (Civ. Code § 5615.) When an emergency assessment is levied for an unforeseen extraordinary expense pursuant to Civil Code Section 5610(c), the notice of assessment must also include a copy of the resolution passed by the board explaining the justification for levying the emergency assessment. (Civ. Code § 5610(c); See also “Emergency Assessments.”)

Annual Budget Report Requirements
The board may not increase the level of regular assessments unless it has complied with various requirements under Civil Code Section 5300 pertaining to the association’s annual budget report:

“Annual increases in regular assessments for any fiscal year shall not be imposed unless the board has complied with paragraphs (1), (2), (4), (5), (6), (7), and (8) of subdivision (b) of Section 5300 with respect to that fiscal year, or has obtained the approval of a majority of a quorum of members, pursuant to Section 4070, at a member meeting or election.” (Civ. Code § 5605(a).)

Membership Approval Requirements; Quorum Set by Statute
Membership approval may be required in connection with a proposed assessment increase (i.e., where a proposed special assessment is in excess of five percent (5%) of the association’s budgeted gross expenses for that fiscal year). In such cases, Civil Code Section 5605(c) sets the applicable quorum requirement as more than fifty percent (50%) of the members, regardless of anything to the contrary in an association’s governing documents. The proposed assessment increase may be approved by a majority of the members voting at an election where such a quorum has been established. (Civ. Code § 5605; Civ. Code § 4070.) The election must be held by secret ballot. (Civ. Code § 5100.)

Duty to Levy Assessments

An association has the affirmative obligation to “levy regular and special assessments sufficient to perform its obligations under the governing documents and [the Davis-Stirling Act].” (Civ. Code § 5600.)

Limitations on Assessment Increases
An association’s ability to increase the amount of regular assessments or to levy special assessments is subject to certain limitations under Civil Code Section 5605(b). (See “Limitations on Assessment Increases.”) Those limitations do not extend to “assessment increases necessary for emergency situations.” (Civ. Code § 5610; See also “Emergency Assessments.”)

Reimbursement & Compliance Assessments
An association may be required by its governing documents to levy a “reimbursement” or “compliance” assessment against a member for damage that member caused to association common area. (See “Reimbursement & Compliance Assessments.”)

Code of Civil Procedure Section 1859. Particular Intent of Statute or Instrument

In the construction of a statute the intention of the Legislature, and in the construction of the instrument the intention of the parties, is to be pursued, if possible; and when a general and particular provision are inconsistent, the latter is paramount to the former. So a particular intent will control a general one that is inconsistent with it.

Rules of Interpretation

Rules of interpretation are important to address issues arising from vague language within an association’s governing documents, or from language within the governing documents that conflicts with the Davis-Stirling Act (“Act”) or the California Corporations Code.

Statutory Language Defers
If any statute uses language to the effect of “unless otherwise provided in the declaration or bylaws…” (i.e., Civ. Code § 4365(e).), the statute is meant to defer to the language in those governing documents of an association.

Statutory Language Controls
If any statute uses language to the effect of “notwithstanding any provision of the governing documents to the contrary…” (i.e., Civ. Code § 4230(a).) or “no governing documents shall prohibit….” (i.e., Civ. Code § 4705(a).), the language within the statute is controlling and overrides any contradictory language in an association’s governing documents.

Statutory Language is Silent
Provisions of the Act may be silent on whether they are intended to control or to defer to the language in an association’s governing documents. Those provisions may nevertheless control where they use the term “shall,” as that term is a word of command and “must be given a compulsory meaning.” (People v. O’Rourke (1932) 124 Cal.App. 752, 759.) For example, Civil Code Section 4910(a) states that “the board shall not take action on any item of business outside of a board meeting.” This language is controlling and would override any contradictory language in an association’s governing documents.

Conflicts Between Governing Documents
There may be conflicting language between an association’s governing documents (i.e., conflicts between the language in the declaration and the language in the bylaws). Those conflicts may be resolved through the application of the hierarchy of governing documents. (See “Hierarchy of Governing Documents” and Civ. Code § 4205.)

Interpretation of Declaration (“CC&Rs”)
California courts have established the following principles with respect to interpreting CC&Rs:

“The same rules that apply to interpretation of contracts apply to the interpretation of [CC&Rs].” (Chee v. Amanda Golt (2006) 143 Cal.App.4th 1360, 1377).

CC&Rs which are “enacted for the mutual benefit of [the] homeowners, are to be interpreted so as to give effect to the main purpose of the contract… and where a contract is susceptible of two interpretations, the courts shall give it such a construction as will make it lawful, operative, definite, reasonable and capable of being carried into effect… [and] avoid an interpretation which will make [the CC&Rs] extraordinary, harsh, unjust, inequitable or which would result in absurdity.” (Battram v. Emerald Bay (1984) 157 Cal.App.3d 1184, 1189.)

“Where two provisions appear to cover the same matter, and are inconsistent, the more specific provision controls over the general provision.” (Starlight Ridge South Homeowners Assn. v. Hunter-Bloor (2009) 177 Cal.App.4th 440, 447; Code Civ. Proc. § 1859.)

“We consider the [CC&Rs] as a whole and construe the language in context, rather than interpret a provision in isolation.” (Starlight Ridge South Homeowners Assn. v. Hunter-Bloor (2009) 177 Cal.App.4th 440, 447.)

Tract Map

The Tract Map (or “Subdivision Map”) is filed by the “Declarant” (typically the CID’s developer) prior to the construction of a Planned Unit Development (“PUD”) (typically, single family home projects). The Tract Map illustrates the dimensions, boundaries and locations of the separate interests (the “lots,” “parcels” or “spaces”) and the common areas.

Condominium Plan

The Condominium Plan is filed by the “Declarant” (typically the CID’s developer) prior to the construction of a condominium project. The Condominium Plan shows the engineering specifications of the CID and contains descriptions and diagrams identifying the boundaries of the separate interests (the condominium “units”), the common areas, and exclusive use common areas (i.e., parking spaces and balconies). (Civ. Code § 4120, Civ. Code § 4285.) By contrast, Planned Unit Developments (“PUDs”) use a “Tract Map” to illustrate the boundaries of the various lots and common areas.

Addressing Maintenance Questions
The boundaries illustrated in the Condominium Plan may help clarify the members’ respective maintenance responsibilities versus those of the association where the maintenance responsibilities under the CC&Rs may be ambiguous.

Suspended Corporation

Most associations are incorporated as Nonprofit Mutual Benefit Corporations under the California Corporations Code. Though corporate status is not required, associations incorporate to avail themselves of certain legal protections afforded to corporations under California law. An association may have its corporate status suspended for a variety of reasons, including:

Failure to file a “Statement by Domestic Nonprofit Corporation” with the Secretary of State. (Corp. Code § 2205.)
Failure to file a “Statement by Common Interest Association” with the Secretary of State. (Corp. Code § 2205.)
Failure to file tax returns. (Rev. & Tax. Code § 23301.)
Failure to pay taxes. (Rev. & Tax. Code § 23301.5, § 23775.)

Verification of Corporate Status
An association may verify its corporate status online via the Secretary of State’s website. If corporate status has been suspended, the association should contact the Franchise Tax Board as well as the Secretary of State’s office.

Impacts of Suspension
“…[E]xcept for filing an application for tax exempt status or amending the articles of incorporation to change the corporate name, a suspended corporation is disqualified from exercising any right, power or privilege.” (Timberline, Inc. v. Jaisinghani (1997) 54 Cal.App.4th 1361, 1365.) A suspension of corporate status may have significant impacts on the association, including, among others:

Association Litigation. A suspended association is unable to initiate lawsuits or to defend itself in lawsuits that are filed against it. Attorneys who engage in litigation for an association with knowledge that its corporate status has been suspended are subject to sanctions. (Palm Valley Homeowners Association v. Design MTC (2001) 85 Cal.App.4th 553.)

Association Contracts. A contract that is executed by a suspended association is voidable at the election of the other contracting party. (Rev. & Tax Code § 23304.5.) A suspended association may therefore lose it’s ability to enforce its contracts with vendors and other third-parties.

A suspension of an association’s corporate status will not operate to relieve the association of its ongoing obligations (i.e., satisfying its maintenance requirements under the governing documents).

Reviving Corporate Status
A suspended association may revive its corporate status through various measures depending upon the reasons underlying the initial suspension. Suspensions based on tax issues may be resolved through paying delinquent tax balances and filing the requisite tax returns. Suspensions based upon failure to file the required statements of information with the Secretary of State may be resolved by filing those statements and paying any resulting fines and penalties.

Corporations Code Section 2205. Suspension of Corporate Status.

(a) A corporation that (1) fails to file a statement pursuant to Section 1502 for an applicable filing period, (2) has not filed a statement pursuant to Section 1502 during the preceding 24 months, and (3) was certified for penalty pursuant to Section 2204 for the same filing period, is subject to suspension pursuant to this section rather than to penalty pursuant to Section 2204.

(b) When subdivision (a) is applicable, the Secretary of State shall provide a notice to the corporation informing the corporation that its corporate powers, rights, and privileges will be suspended after 60 days if it fails to file a statement pursuant to Section 1502.

(c) After the expiration of the 60-day period without any statement filed pursuant to Section 1502, the Secretary of State shall notify the Franchise Tax Board of the suspension and provide a notice of the suspension to the corporation, and thereupon, the corporate powers, rights, and privileges of the corporation are suspended, except for the purpose of filing an application for exempt status or amending the articles of incorporation as necessary either to perfect that application or to set forth a new name.

(d) A statement pursuant to Section 1502 may be filed notwithstanding suspension of the corporate powers, rights, and privileges pursuant to this section or Section 23301, 23301.5, or 23775 of the Revenue and Taxation Code. Upon the filing of a statement pursuant to Section 1502 by a corporation that has suffered suspension pursuant to this section, the Secretary of State shall certify that fact to the Franchise Tax Board and the corporation may thereupon be relieved from suspension unless the corporation is held in suspension by the Franchise Tax Board by reason of Section 23301, 23301.5, or 23775 of the Revenue and Taxation Code.

Governing Documents

An association’s “governing documents” are defined as “the declaration and any other documents, such as bylaws, operating rules, articles of incorporation, or articles of association, which govern the operation of the common interest development or association.” (Civ. Code § 4150.)

In addition to state, local and federal laws, a common interest development (“CID”) is governed by its governing documents. The governing documents may have been initially drafted by the CID’s developer, but are subject to amendment by the association and its membership over time. (See “Amendments to Declaration,” “Amendments to Bylaws,” and “Adopting & Amending Operating Rules.”)

The types of governing documents for any particular CID or association will vary slightly based upon the nature of the CID itself:

Governing Document	PUDs	Condo Projects	Stock Cooperatives
Declaration (CC&Rs)	√	√
Bylaws	√	√	√
Articles of Incorporation	√	√	√
Operating Rules	√	√	√
Election Rules	√	√	√
Architectural Guidelines	√	√	√
Tract Map	√
Condominium Plan		√
Proprietary Lease			√

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