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March 13, 2011

IS LAMDEN UNRAVELING?

Your Maintenance Decisions Might Be Called Into Question

I"    pivotal case was decided in California in 1999. Although hotly contested and with some chilling turns (in the appellate court), the result was that a standard was established which favored deferring to board decisions in HOAs regarding maintenance decisions. This was not a new standard - it was consistent with the statutory "Business Judgment Rule" applicable to incorporated associations, which told courts to defer to business judgments made in good faith and with the interests of the shareholders in mind. The case decision presented firm affirmation from the Supreme Court of California that owners who wished to challenge the decisions of HOA boards regarding maintenance would fail, so long as the Board acted consistently with the BJR and had a "plan" for fulfilling its maintenance responsibilities.  But over the past year or two, the courts have more tightly defined what is meant by an appropriate "plan".

BUSINESS JUDGMENT RULE AFFIRMED FOR ALL HOAS: LAMDEN v LA JOLLA SHORES CLUBDOMINIUM HOMEOWNERS ASSN, 21 Cal.4th 249, 980 P.2d 940, 87 Cal.Rptr.2d 237, Aug. 9, 1999. In this case a condominium unit owner brought action seeking a court order that the association fumigate the entire building for termites.  The board was "spot-treating" areas. The Supreme Court held that the board's "decision to use secondary, rather than primary, treatment in addressing the development's termite problem was subject to deferential review." 

IMPORTANT: Common law business judgment rule has two components, one which immunizes corporate directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith in what the directors believe is the organization's best interest.

MUCH QUOTED PASSAGE:

"Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. Thus, we adopt today for California courts a rule of judicial deference to community association board decision-making that applies, regardless of an association's corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations' boards of directors."

WHEN CAN YOU RELY ON LAMDEN?

The Assn diligently pursued a solution to a difficult and elusive problem ­ adopted a fix (even though it was much less expensive and extensive of two recommendations) and ultimately advised owners of its (Assn's) less than 100% responsibility position: CALEMINE et al. v. JARED COURT HOA, 2009. [NOT CERTIFIED FOR PUBLICATION MEANING IT CANNOT BE CITED AS CONTROLLING LAW, BUT IS INDICATIVE OF HOW A HIGHER COURT JUDGES HOAs UNDER LAMDEN.]

In this case, some very frustrated owners brought suit against the Association to repair damages caused by water intrusion. The board had undertaken many measures to try and resolve the issues. It sued the developer, got a judgment, with the proceeds hired a company (Westar) to repair and waterproof the interior of the below-grade surfaces of the garages and bonus rooms (which repairs proved defective), sued that company (Westar), used the proceeds to make more expensive repairs based on one of two expert's opinion of what was needed (one of which involved $1.1M in costs which was nearly 50% more than the Westar lawsuit proceeds. This repair called for extensive trenching and disruption to common areas. A less expensive/extensive repair was also proposed ranging in cost from $305,000 to $119,800. The HOA board chose the less expensive/extensive repairs and utilized the proceeds of the Westar lawsuit settlement and used the remaining money for other common area repairs and improvements unrelated to water intrusion. The board was advised that the repair company would "not take responsibility" for the below grade areas because of issues not within their control. The Board notified owners that it had determined it to be "in the best interests of the Association to assert the position that it is not and will not be responsible for any water intrusion into the below grade portions of the units ... or to pay to repair or abate damage to construction materials or personal property in these areas resulting from such water intrusion."

All of this including the final position of the board was enough for the court to give deference to the Board's decision, based on Lamden.

WHAT TAKES HOAs OUT OF THE LAMDEN PROTECTION? (OR ...IN SOME CASES THE QUESTION IS CAN YOU BAIL?)

The Association tried to pass liability for a building-wide defect in common area which was a fire/safety hazard on to an owner. RITTER v. CHURCHILL CONDO ASSN, 166 Cal.App.4th 103, 82 Cal.Rptr.3d 389, 2008.

In this case, the homeowners sued the association and the individual directors for damages and court order to fill unfilled slab penetrations in the building. The HOA sought to require the owners to fill penetrations adjacent to their units and for fines for failure to do so. The court found in favor of owners except for liability of board members ­ they were absolved based on Lamden deference standard (but association was not).  The dispute in this case arose over the existence of these slab penetrations and the duty, if any, of the Churchill HOA to repair the condition which arose because the penetrations were not properly finished during the initial construction of the building. The Ritters hired their own expert engineer who conducted his own investigation. He reported that the source of nuisance odors (including offensive cigarette smoke) reported by Ritters was due to the slab penetrations and opined that these holes constituted a fire hazard and should be filled or fire stopped. The Board hired a professional engineer and a ventilation system expert to investigate and they agreed the problem was caused, in part, by the slab penetrations in the Ritter's unit floor and also concluded that slab penetrations posed a significant fire safety risk. The board concluded based on the 1999 Building Code that the Ritters should have filled any floor penetrations which were exposed while remodeling their Unit, and that doing so would abate the odor problem. The Board believed that the Ritters were responsible for making the holes in the slabs and after a hearing imposed daily fines of $200 per day on the Ritters. The Board said all fines would be waived if the Ritters filled the holes within 30 days after the order. The Board attached a bid from a contractor offering to complete the work adjacent to their 2 units for approximately $2,700 per unit. The Ritters declined the Board's offer. The Ritters prevailed over most of their claims although they took a 25% hit on liability.

What hurt the association the most? The court focused on the "protection" aspect, seeing the Association as akin to a Landlord in this situation (which is for HOAs a dangerous perspective liability-wise but which has been done years ago in a pivotal liability case Frances T. v. Village Green HOA). The court in Ritter said: "Courts have repeatedly declared the existence of a duty by landowners to maintain property in their possession and control in a reasonably safe condition."  And "Landlords' duty to maintain property in their possession and control in a reasonably safe condition requires them to act toward their tenants as reasonable persons under all of the circumstances, including the likelihood of injury, the probable seriousness of such injury, the burden of reducing or avoiding the risk, and their degree of control over the risk-creating defect."

The duty of a Landlord is commonly higher with regard to liability than a "mini-government" which is another way of viewing HOAs as has been done in crucial HOA  cases. The court required the Association to fill the slab penetrations in the Ritters' units but not all units in the building as the Ritters had asked.

Interestingly, the Court found: "The rule of judicial deference providing protection from personal liability for the individual directors of a non-profit condominium homeowners association does not provide cover to the association itself in the remedial context, such as injunction and rescission cases." [This seems incongruous but the court said No. Still, it is in direct conflict with the Lamden case where the owner sought an injunction for the Board to do a specific thing and the association prevailed.]

Owners received reimbursement of substantial attorneys fees even though they did not win on all counts and even though the actual judgment (under $5000 for the slab repairs, taking into account their 25% liability factor) was insignificant.

The Association may not use Lamden to supplant the law and/or governing documents definition of responsibilities. DOVER VILLAGE VS. JENNISON, 191 Cal.App.4th 123, 119 Cal.Rptr.3d 175, 2010.

The HOA charged an owner for sewer repairs to lines that ran under the condominium. In this case, the Association attempted to use Lamden as a sword instead of a shield, claiming it supported the argument that the board's decision on maintenance responsibility should be accepted by the court. The HOA opined that the sewer pipes were "exclusive use common area". The court in Dover Village called this attempt to use Lamden as: "a nice illustration of matters genuinely within a board's discretion," but didn't find it controlling. (My emphasis.)

Why? Because the court found the sewer pipes to be common area and the association's responsibility finding that: "Under a natural reading of the CC & R's, the sewer pipe was a genuine common area to be maintained and repaired by the association, as distinct from 'an exclusive use common area appurtenant' to an individual owner's separate interest." The court examined Civil Code Section 1364 of the Davis-Stirling Act which defines "exclusive use common area [as]... a portion of the common areas designated by the declaration for the exclusive use of one or more, but fewer than all, of the owners of the separate interests and which is or will be appurtenant to the separate interest or interests." And went on pointing out:

"(1) Unless the declaration otherwise provides, any shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patio, exterior doors, doorframes, and hardware incident thereto, screens and windows or other fixtures designed to serve a single separate interest, but located outside the boundaries of the separate interest, are exclusive use common areas allocated exclusively to that separate interest." (Italics added.)

The court also reviewed the CC&Rs and found that although there were some areas designated "exclusive use common area", the sewer pipes were not. Thus, the judges decided: "There is no question under the CC & R's that sewer pipes are not within any individual owner's separate interest. Article I, section 6 of the CC & Rs for Dover Village says: 'The following are not a part of the Unit: roofs, foundations, below finished pad elevation, pipes, ducts, flues, chutes, conduits, wires and other utility installations wherever located, except the portions thereof located within the physical boundaries of the Unit." (Italics added.)"  and said "A sewer system is a series of interconnected pipes which ultimately feed into one common line. Differentiating parts of that interconnected system is unreasonable. The portion of piping coming from one unit is no more affixed to that unit than it is to the sewer system and other pipes or piping within that system. ... Some pipes-for example, drain pipes exclusively servicing one unit and not connected to any other system of piping-might indeed come within the category, because they can be said to be, like shutters and window boxes, "designed to serve a single separate interest." But a piece of a system of interconnected sewer piping does not fit: It is, literally, physically connected to every other piece of the system."

So here, the use of Lamden was misplaced. The court's bottom line: "There is an obvious difference between a legal issue over who precisely has the responsibility for a sewer line and how a board should go about making a repair that is clearly within its responsibility. But we know of no provision in the Davis-Stirling Act or the CC & R's that makes the Association or its board the ultimate judge of legal issues affecting the development."

Neither Association nor management did enough due diligence to identify and try to resolve a chronic problem. AFFAN et al., v. PORTOFINO COVE HOA and HUNTINGTON WEST PROPERTIES, INC., 189 Cal.App.4th 930 2010.

In this case, the owners of condominium unit brought action against homeowners association and its managing agent for failure to maintain and repair the common area plumbing, which resulted in a sewage blockage that caused flooding of plaintiffs' condominium unit, and for failure to remediate the resulting damage and contamination. [The Trial Court found the HOA responsible to indemnify owner plaintiff for casualty loss of $33,800 - but denied all parties recovery of attorney fees - because it found that the Association was not negligent based on Lamden deference standard.] The Appeals court found Lamden did not protect the Board because the Board (in simple terms) did not really have a plan for dealing with the chronic problem! The association eventually did hire Rescue Rooter on an annual "routine" maintenance contract and RR did hydrojet the lines but shortly thereafter, there was a major backup ­ and so added to the question was whether that work was done negligently (it was not done in the way that one of the trial experts opined needed to be done). The court found that simply reacting to several complaints over a 10 year period by snaking drains instead of consulting a master plumber and arranging for the correct fix was not a plan worthy of the Lamden defense.

Holdings of appeals court:

(1) the Lamden judicial deference standard applicable to the ordinary maintenance decisions of homeowners associations did not apply to condominium association's managing agent, and

(2) evidence did not establish a maintenance decision by defendant condominium association, as a predicate for association's assertion of the Lamden judicial deference standard.

THE PROBLEMS OF THIS CASE (OR ... THE "TAKE AWAY" OF WHAT YOU CAN DO TO AVOID THIS KIND OF SITUATION)  

  • HOA knew about the evidence of many backup (sewage residue found in the sink and tub when owners returned to the unit periodically) problems and failed to investigate for 10 years.

  • HOA couldn't show that it had even compared costs and benefits to individual snaking as opposed to clearing mainline.

  • HOA stuck to handling things piecemeal.

  • HOA did too little too late.

IMPORTANT FINDING: "The judicial deference doctrine does not shield an association from liability for ignoring problems; instead, it protects the Association's good faith decisions to maintain and repair common areas."

AND ­ BY THE COURT - PERHAPS A HINT: (going back to the Jared board's challenge of being "caught between a rock and a hard place" but perhaps inconsistent with Ritter): "There may be some rare situations in which an association's decision to do nothing to address a common area maintenance issue deserves judicial deference. For example, we can envision a scenario in which an association faces two extreme choices: doing nothing or adopting a prohibitively expensive course of action. A court may decide to extend judicial deference to an association's choice of inaction in that narrow context, if the choice stemmed from deliberations that carefully weighed the alternatives and gave primacy to the best interests of the association and its members. The present case, however, does not present that scenario. As already noted, the Association's inaction was not the result of any deliberative process.  (My emphases)

Last but not least, the following situation though not about Lamden, may suggest something Associations should consider seriously, i.e., considering the efficacy of self-help before resorting to expensive attorneys and the courts to resolve a situation.

CHAPALA CASE (Owner installed white vinyl windows contrary to association's requirement of brown frames, and refused to paint.) The Court affirmed an attorneys' fees award (begrudgingly) in favor of the association - which prevailed against the owner who ignored window frame color standards of the Association. But the court wondered why the Association did not instead of using expensive court remedies (spending over $80,000 on its attorney), use self-help instead, spending about $300 to paint the window frames and charging the owner (as allowed by the CC&Rs). The same "wonderment" could be asked of the owners! Why pay an attorney to defend all the way to trial and appeal when $300 would have solved the problem?

It's definitely food for thought.

    copyright 2011, Beth Grimm, all rights reserved.

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.




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