LHC Newsletter Vol 7, No. 5

REVIEW OF NEW LEGISLATION AND APPELLATE DECISIONS AFFECTING HOMEOWNER’S ASSOCIATION IN 2014

By: Robert D. Hillshafer, Esq.

Loewenthal, Hillshafer & Carter, LLP

Important Appellate Court Decisions

1.         Huntington Continental Townhouse Association, Inc. v. Joseph A. Minor (2014) 2014 S.O.S. 4543.

Why significant:      It represents a continuing trend that is limiting the use of the foreclosure remedy specifically, holding Association’s to a high standard of compliance while ignoring the prejudice to Association’s when owners do not pay assessments.

This appellate court decision may prove to have a dramatic impact on how Association’s operate in the context of collections and may have a significant impact on Association vendors who are hired to effectuate collection of delinquent assessments.  Following in the footsteps of the Diamond case from 2013, the Appellate Courts seem to be leaning heavily in favor of protecting individual owner rights while making the Association’s ability to collect assessments and the costs are necessarily incurred in exercising the Association’s remedies for collection.

Civil Code Section 5655(a) provides that “any payments made by an owner of a separate interest toward a debt described in subdivision (a) of Section 5650 shall first be applied to assessments owed and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection….”

This case stands for the proposition that under Civil Code Section 5655(a), Associations MUST accept partial payments tendered by homeowners, regardless of when tendered or how much was tendered, and apply them first to the amount of assessments owed and then to collection costs, without regard to pending collection actions or remedies.  The basic language of this statute has been present for years and most legal counsel and collection companies interpreted the statute to mean that “payments accepted by the Association” must be applied to pay down assessment liability first, which “could” impact collection remedies based on the $1800 requirement for foreclosures on assessment liens.  However, this language had never been construed to mandate that the Association was obligated to accept partial payments whenever tendered.  In fact, good collection practice has been not to accept partial payments at a certain point in the collection process because doing so would undermine the Association’s ability to collect already incurred fees and costs and would allow the owner to “game” the system.  Practically, this decision gives an owner the ability to unilaterally derail a non-judicial foreclosure action merely by submitting a partial (or even nominal) payment to bring the delinquent assessments under $1,800 (foreclosure threshold) even on the day of a notice Trustee’s Sale.  The impact of that is to leave the Association responsible for collection fees and costs with no immediate way to collect without starting a lawsuit.

The court rejected arguments that other statutory provisions regarding payment proposals did not mandate that Association’s had to agree to terms proposed by members and if that was the case, why should an Association have to accept a partial payment which impairs its remedies.  The court did not consider the lack of legislative intent or lack of clear language discussing acceptance of partial payments outside of a payment agreement to be significant.  It seems the court was focused on preventing the Associations from effectively using the foreclosure remedy provided in statute.  The court was entirely unsympathetic to the Association’s difficulty in recovering collection costs caused entirely by the delinquent owner.

I see this case as potentially forcing the Association to use a combination of judicial foreclosure/money judgment action as opposed to the faster and less expensive non-judicial foreclosure process to collect delinquent assessments.  Either that or simply a straight breach of CCRs action to obtain a money judgment.  By taking that path, even if a partial payment is made, the Association can proceed to obtain a judgment for the remainder of the assessments and all collection costs, even if the assessment balance falls below $1,800.

The case does not attempt to limit the waiver of the right to make partial payments pursuant to a written payment plan or foreclosure forbearance agreement which is defaulted upon.  Therefore, it should become standard practice in payment plans to require an express waiver of the right to submit partial payments after a default on the payment plan, at least until another decision rules otherwise.

2.         Beacon Residential Community Association v. Skidmore Owings and Merrill (2014)

Why significant:      Provides Association’s with a clear right to pursue claims against designers of residential housing in construction defect cases and should eliminate the standard practice of such defendants attempting to escape responsibility based on lack of contractual privity with the architect.

This case involved an Association that sued for construction defects in a condominium project and included negligence claims against the architects/designers of the project that were hired by the developers.

The California Supreme Court clarified several prior decisions which seemed to indicate that architects and engineers could not be held responsible by end users of real property based on negligence because they owed no duty of care to the Association or its members.  The Supreme Court held that architects do owe a duty of care to future homeowners based on common law interpretation of duty.  This decision was based on the fact that the architect’s work was intended to affect the ultimate homeowner and defective design would foreseeably impact the homeowner, among other factors.

3.         Bel Air Glen Homeowners Association v. Dwlatshahi (2014) not certified for publication.

Why significant:      This case is significant because it illustrates just how expensive enforcement actions can be, even when the issue appears to be simple. It also illustrates that court’s can make strange and inexplicable decisions.

This case involved an Association’s attempt to enforce a provision in its CCRs which entitled the Association to have a copy of a lease between an Owner and Tenant for the purpose of determining who the tenant was and that the lease contained terms consistent with the requirements of the CCRs relative to leases and tenants.  The Association made a demand for a copy of lease from the owner because the property was being resided in by a third person, who ultimately was the Owner’s attorney.  The Owner and the attorney indicated that the property was not leased and there was no lease in place.  They did not advise the Association that the property had been transferred to the attorney via an unrecorded Quitclaim Deed.  At one point in time, the attorney represented in writing to the Board that the Owner was still the owner of the property, even though it had been deeded previously.  When told there was no lease, the Association did not request information about any other possible reason why the attorney was residing at the property.  The Association levied a total of $13,000 in fines against the Owner based on the failure to provide the lease.

The Owner sued the Association alleging harassment and the Association cross-complained to recover the fines and damages for the Owner’s failure to produce the lease.  Prior to trial, the Owner dismissed its harassment claims and the Association dismissed all of its claims except for $2,000 in fines.

The trial court found that the Owner had a defense to the fines because there was no lease, but the court further found that the Owner had conspired with the attorney or aided the attorney in deceiving the Association. The trial court also found that the attorney had defrauded the Association by stating that the Owners remained the owners when he was the recipient of a quitclaim deed to the property. The court found that Association was entitled to know and had the need to know that the property had been transferred.  The court awarded the Association $2,000, declared the Association the prevailing party and awarded $63,910 in attorney fees and costs.

The appellate court reversed the trial court decision, finding that the Association had only sought the lease and had not asked for any other alternative explanation or documentation.  The Association offered no authority for the Owner having a duty to disclose the transfer by unrecorded quitclaim deed in the absence of an express request for such disclosure.  The parties were ordered to bear their own costs.

4.         Talega Maintenance Corporation v. Standard Pacific Corporation (2014) 225 Cal. App. 4th 722.

Why significant:       Provides guidelines as to when “speech” that occurs at a Association board meeting is not “protected” such that not “all” speech at meetings is protected and inadmissible.

In a growing trend in HOA cases, the anti-SLAPP (strategic lawsuit against public participation) is again a central theme in this construction defect and breach of fiduciary duty case.  This statute forms the basis for attacking claims which arise out of certain communications in certain settings that are deemed privileged based on public interest so as to avoid the chilling effect of being sued from exercising free speech rights.

The Associations sued the developer and three former employees of the developer (who had been appointed to the Board by the developer) relative to construction defects in certain trails constructed by the developer in the community.  Association alleged that the former directors/employees committed fraud, negligence and breach of fiduciary duty as directors of the Association concerning the developer’s obligations to pay for repairs to the trails.  The employees filed the anti-SLAPP motion to dismiss claiming that the claims against them arose from protected statements made at HOA board meetings.  The trial court denied the motion and the employees appealed the decision.  The court of appeal affirmed the trial court’s decision.

The alleged protected statements made during an HOA Board meeting concerned what entity was responsible for paying for the maintenance and repair of these trails.  The employee directors represented to the rest of the Board and the membership that the Association was responsible for these costs.  The Association contended that these statements were false and a breach of fiduciary duty.

The importance of this case is the appellate court’s decision to narrowly apply and construe the anti-SLAPP laws and not adopt a general approach that all statements made in an HOA Board meeting necessarily constitute a “public issue” but instead require that the alleged protected speech and statements relate to or involve a public issue, controversy or dispute.  In this context, the statements which were the basis for the claims against the developer directors were not properly viewed as a public issue, controversy or dispute that would render them protected.

5.         KB Home Greater Los Angeles, Inc. v. Allstate Insurance (2014) 168 Cal. Rptr. 3d 142.

Why significant:       This case is significant because it means under the Right to Repair Act, mitigation and repair efforts by owners and associations may necessarily be delayed until notices are given to developers and builders.  As a practical matter, it also means that owners and association’s are going to be held to a strict standard for compliance with notice under the Act, even if they weren’t aware the loss was caused by a construction defect at the time repairs were started.

This case involved the property insurer of the purchaser of a new home from KB filing a subrogation claim against KB for property damage caused by a water leak in the home.  When the leak occurred the owner contacted Allstate, who in turn hired a mitigation/remediation contractor to perform emergency services and repair the damage to the home.  After paying for the repairs, Allstate sent KB a notice of its intent to seek recovery of the amounts paid to correct the damage from the defective plumbing pipe which burst.  KB did not respond so Allstate filed suit alleging a violation of the Right to Repair Act.

KB argued to the trial court that neither Allstate or its insured had complied with the notice provisions of the Right to Repair statute which entitled KB to inspect the damage and have an opportunity to propose a repair that it would perform. The trial court rejected that argument based on a decision in the Liberty Mutual case by the California Supreme Court decided in 2013, and the trial court decisions were appealed.  That case allowed an insurer to recover from the builder for actual property damages the carrier paid as a result of a construction defect.

The court of appeals ruled that the issue in this case was whether the Act requires notice of a claim under the Act prior to making repairs and indicated that the Liberty Mutual case did not involve that scenario because the builder was given the opportunity to repair.  The court of appeals ultimately found that the subrogation claim was barred because Allstate and the insured did not give notice of the claim under the Act until after repairs were completed, thereby denying KB the opportunity to repair.

6.         Seahaus La Jolla Owners Association v. Superior Court (2014) 224 Cal. App. 4th 754.

Why significant:       Clarifies that the attorney-client privilege applies to members of the Association whose “common interests” are protected in a lawsuit for common area defects.

The Association filed a construction defect lawsuit against the developer relative to common area water intrusion problems.  The Association’s litigation counsel conducted meetings with homeowners to inform them of the status and developments in the case.  The developer sought discovery of the information disclosed by counsel to the members of the Association at these meetings and the Association objected that the attorney client privilege applied.  The trial court ruled against the Association and the Association appealed.

On appeal, the appellate court looked at the disclosures made in the context of the Davis-Stirling Act obligations owed by an Association to its members and other factors which mandate the involvement of owners in Association members in decisions regarding construction defect actions.  The appellate court ultimately concluded that the Association’s duties and powers included communications with members, as parties with closely aligned interests.  The court further concluded that the litigation meetings were held to accomplish the purpose for which the association lawyer’s were consulted, including disclosures which the Association was obligated to make.  Consequently, the communications at these meetings were deemed privileged and protected under the common interest doctrine.

NEW LEGISLATION IN 2014

1.         AB 968:          Exclusive Use Common Area:    Civil Code Section 4775 provides that unless the governing documents provide otherwise, the Association is responsible for replacing, repairing or maintaining common areas but that owners of separate interests are responsible to maintain the exclusive use common areas serving their units.  This always raised the question as to who was responsible to “repair or replace” the exclusive use common areas:  Owners or the Association.  AB 968 now clearly provides that the Association shall have the obligation to repair and replace exclusive use common area and the Owners simply “maintain” it.  This law still doesn’t clarify or define what “maintain” really means but it does seem to support a conclusion that maintenance is different than repairing or replacing, therefore placing it more on a cosmetic or appearance level rather than a functionality or structural level.

2.         AB 1738:        Attorneys at IDR:    Allows both Association’s and owners to bring attorneys to Internal Dispute Resolution meetings, which in some ways defeats the intent of the IDR process in the first place and will necessarily increase expenses.  However, the flip side of that is that many IDR meetings are not productive in any event because the Board representative and homeowner are “afraid” to enter into an agreement to resolve without having legal advice, which results in many IDR’s being a waste of time and the dispute ends up involving attorney’s in any event.  There is a fair amount of debate concerning whether the IDR process is truly beneficial in resolving the types of disputes which seem to arise in the Association context, which are often personal and emotionally charged with one side being fundamentally unreasonable or using the process to delay.

3.         AB 2100:        Drought Restrictions:       This law prohibits Associations from fining owners for failing to water during the drought emergency resulting in aesthetically unpleasing landscaping.  The one exception is where reclaimed water is available for irrigation purposes within a development.  This law also prohibits Associations compelling owners to power wash during the drought unless using non-potable water.

4.         AB 2561:        Fruit/Vegetable Gardens: This law limits the ability of Associations to regulate or prohibit personal agriculture activities in the “backyards” of private lots within common interest developments.

5.         AB 2064         Earthquake Insurance/Mandatory Offer:          Prior law prohibits a policy of residential property insurance from being issued or delivered or initially renewed in this state unless the named insured is offered coverage for loss or damage caused by an earthquake,as provided, and, if the offer of earthquake coverage is accepted, requires the insurer to provide certain disclosures based on whether the policy was issued by the California Earthquake Authority. This law revises the disclosure language an insurer is required to use in offering earthquake coverage, making the contents of that disclosure language dependent upon whether the insurer is a member of the CEA or not, and by requiring insureds to be provided with specified disclosures with regard to coverage of losses, the CEA’s liability limitations, and premiums concurrent with the issuance or renewal by the CEA of a residential earthquake insurance policy. The bill would require a participating insurer, at least once each year, to provide each of its residential property insured with marketing documents produced at the CEA’s expense. The bill would make these provisions operative on January 1, 2016.

6.         AB 2104         Water efficient landscapes:         This law requires that a provision of the governing documents or of the architectural or landscaping guidelines or policies shall be void and unenforceable if it prohibits, or includes conditions that have the effect of prohibiting, low water-using plants as a group or as a replacement of existing turf, or if the provision has the effect of prohibiting or restricting compliance with a local water-efficient landscape ordinance or water conservation measure.

7.         AB 2430:        Transfer Disclosure:                     The Davis-Stirling Common Interest Development Act requires an association, upon written request, to provide the owner of a separate interest, or a recipient authorized by the owner, with a copy of specific documents relating to transfer disclosures that the owner is required to make to a prospective purchaser of the owner’s separate interest. That act authorizes the association to collect a reasonable cost for delivery of those documents but prohibits any additional fees for electronic delivery. This bill would require the cost for providing the required documents to be separately stated and billed from other charges that are part of the transfer or sales transaction. This billwould authorize an association to collect a reasonable fee from a seller for its actual costs in providing documents under these provisions andwould require a seller to be responsible forcompensating an association, person, or entity for providing documents under these provisions. This bill would also require a seller to provide a prospective purchaser withcertain current documentsthat the seller possesses free of charge. This bill would prohibit a seller from giving a prospective purchaser the required documents bundled with other documents.

8.         SB 752:          Commercial and Industrial Common Interest Development Act:The Davis-Stirling Common Interest Development Act provides for the creation and regulation of common interest developments, as defined, but exempts common interest developments that are limited to industrial or commercial uses from specified provisions of the act. This law establishes the Commercial and Industrial Common Interest Development Act, which provides for the creation and regulation of commercial and industrial common interest developments.

9.         AB 2188:        Solar Energy:          Prior law prohibited any covenant, restriction, or condition contained in any provision of a governing document from effectively prohibiting or restricting the installation or use of a solar energy system.  Prior law exempted from that prohibition provisions that impose reasonable restrictions on a solar energy system that do not significantly increase the cost of the system or significantly decrease its efficiency or specified performance. Prior law defined the term “significantly to mean an amount exceeding 20% of the cost of the system or decreasing the efficiency of the solar energy system by an amount exceeding 20%, and with regard to photovoltaic systems that comply with state and federal law, an amount not to exceed $2,000 over the system cost or a decrease in system efficiency of an amount exceeding 20%. This law defines the term “significantly,” for these purposes, with regard to solar domestic water heating systems or solar swimming pool heating systems that comply with state and federal law, to mean an amount exceeding 10% of the cost of the system, not to exceed $1,000, or decreasing the efficiency of the solar energy system by an amount exceeding 10%, and with regard to photovoltaic systems that comply with state and federal law, an amount not to exceed $1,000 over the system cost or a decrease in system efficiency of an amount exceeding 10%. Prior law required an application for approval for the installation or use of a solar energy system to be processed and approved by the appropriate approving entity as an application for approval of an architectural modification to the property and prohibits the approver from willfully avoiding or delaying approval. Prior law required the approving entity to notify the applicant in writing within 60 days of receipt of the application if the application is denied, as specified.  This time period has been reduced to a written notification of denial within 45 days.

10.       AB 1360:        Proposed Electronic Balloting Bill:       Current law requires that a common interest development be managed by an association and that elections related to the governance or administration of the common interest development conform to specified requirements. This bill allows associations to conduct elections by optional electronic voting. If electronic voting is to be conducted, each member must be given an opportunity to indicate that he or she will be voting electronically and to provide ballots. The electronic balloting service provider is to retain the electronically submitted ballot data until the time allowed for challenging the election has expired.

11.       AB 746:          Proposed Bill re Smoking in Multifamily Dwellings: This bill would prohibit the smoking of a cigarette or other tobacco products in all areas of multifamily dwellings, except those areas designated as areas where smoking is permitted, as specified. This bill would define, for the purposes of these provisions, multifamily dwellings to mean residential property containing 2 or more units with one or more shared walls, floors, ceilings, or ventilation systems. This bill would provide that any person who violates the requirements of the bill is guilty of an infraction, punishable as specified. The bill would require the State Department of Public Health to develop, implement, and publicize a smoking cessation awareness and educational program, including a description of the penalties that shall be imposed for a violation of the bill’s provisions.