Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268

Case Summary

In 2016, the Court of Appeal released its opinion in Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268, causing much discussion in the common interest development industry. The Court of Appeal reversed the trial court’s grant of summary judgment in favor of defendant Erna Parth, finding that there was a material issue of fact whether Mrs. Parth “acted in an informed basis and with reasonable diligence” and was therefore protected from liability by the “Business Judgment Rule.” The Court of Appeal reviewed the alleged actions taken by Mrs. Parth, which included authorizing contracts, hiring an unlicensed contractor, signing promissory notes, and terminating the management company, all without board approval. She also signed a contract with a security company even though the Board had voted to obtain bids from other security companies. The Court of Appeal remanded the case to the trial court for further proceedings.

On October 9, 2018, following a 25 day court trial, the Superior Court, the Honorable James T. Latting, Judge Presiding, issued its ruling in favor of Mrs. Parth.

Judge Latting first noted that Mrs. Parth is 89 years old and a former volunteer member of the Board, which consisted primarily of retirees; that Mrs. Parth had no formal training to serve on the Board of Directors and did not have a business background. During her service on the Board, the Association employed professional management, and the Association had legal counsel the entire time she served on the Board.

Expert testimony for both the Association and Mrs. Parth indicated that it was “custom and practice” for boards to rely on professional management, in particular managers holding the CCAM designation, for advice on issues such as whether the Board was in violation of the governing documents, or whether a legal opinion should be sought. The three managers assigned to the Association between 2005 and 2001 all held the CCAM designation. Mrs. Parth also relied on director ApRoberts, a CPA, regarding the Association’s financial affairs.

With regard to the allegations that Mrs. Parth acted unilaterally and without approval, the court found that the Association did not present supporting evidence. Mrs. Parth did not unilaterally hire Warren Roofing; she was one of five directors who made that decision. She relied on management to review and approve invoices for the work, which it was obligated to do under the management contract. Similarly, Mrs. Parth did not unilaterally sign loan documents; the loans were approved by the Board, and there was no evidence that management advised that a vote of the members was required, or that legal counsel should review the loan documents.

The court also found that Mrs. Parth did not unilaterally retain Jesse’s Landscaping and did not unilaterally process payments; instead the management company did so. And there was no evidence that Mrs. Parth unilaterally fired the management company.

Finally, as to the patrol contract Mrs. Parth signed that prompted the lawsuit, the court found that Mrs. Parth believed she was merely renewing the contract, not “entering a new deal,” and that she signed at the request of the manager.

Based on the evidence presented, the court concluded that Mrs. Parth did not act in bad faith, or in her self-interest, and was protected by the Business Judgment Rule and the indemnification provisions in the governing documents.

Takeaway

Despite the outcome in the trial court, the 2016 Parth opinion provides a lesson in how to comply, or not comply, with the Business Judgment Rule. The trial court decision is not legal precedent, but makes it clear that board members are entitled to and should reasonably rely on the advice and recommendations of managers and the management company as experts.

Heron Bay Homeowners Association v. City of San Leandro (2018) – 19 Cal.App.5th 376

Case Summary

Halus Power Systems sought approval from the City of San Leandro for a zoning variance to construct a 100-foot-tall wind turbine on an industrial parcel. The property is located in an estuary, where many species of waterfowl and shorebirds, including threatened or endangered species, reside. The property is also roughly 500 feet from the 629-unit Heron Bay residential development. The city approved the construction of the turbine, finding that the significant environmental effects of the project could be reduced to insignificance through mitigation measures. The Heron Bay Home Owners Association filed suit under California Environmental Quality Act (CEQA), asserting that the city needed to prepare an environmental impact report (EIR) for the project.

The trial court entered judgment in favor of the Association. The Association then requested an award of attorneys’ fees under California Code of Civil Procedure section 1021.5, which authorizes an award of attorneys’ fees to the prevailing party in a case that enforces an important right affecting the public interest. The trial court awarded the Association only part of the fees it sought, finding that the Association “had a significant financial incentive to initiate the litigation,” since the Association members had brought the suit in part because they feared the turbine would cause their property values to decrease. However, it also found that they were also motivated by “non-pecuniary” concerns for the project’s impact on wildlife, aesthetics, health and noise levels. As a result, the court apportioned financial responsibility for their attorneys’ fees during the administrative proceedings entirely to the Association, but because of the “different risks and much larger financial commitment” of CEQA litigation, it divided equally the responsibility for the fees the HOA incurred for the litigation between the HOA on one side, and the city and Halus Power on the other.

Halus Power and the city appealed the award of attorneys’ fees, arguing that a fee award was not appropriate because the value of the benefit to the members of the Association (i.e., maintenance of their property values) far exceeded the financial burden of litigation. However, the Court of Appeal found that any financial benefit to the homeowners was speculative since the litigation was not certain to prevent construction of the turbine or even change the project, and preservation of property values was not immediately or certainly “bankable” and that fees could be apportioned because the record supported a finding that the Association’s motivations were not purely financially self-interested.

Takeaway

Trial courts have considerable discretion in awarding and apportioning attorneys’ fees under Section 1021.5 based on the particular facts of each case. More importantly, it makes it crystal clear that CEQA plaintiffs that might avoid a decrease in their property values by successfully challenging a project are not cut off from recovering section 1021.5 attorneys’ fees. Also, before initiating an action regarding an offsite issue, check the governing documents to make sure association is authorized to use association funds.