LHC Newsletter, Vol 8, No. 1

REVIEW OF LEGISLATION AND APPELLATE DECISIONS

AFFECTING HOMEOWNER’S ASSOCIATIONS IN 2015

Robert D. Hillshafer, Esq.

David A. Loewenthal

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.

  1. Ryland Mews Homeowners Association v. Munoz (2015) 2015 S.O.S. 1065

Why significant:       Because the appellate court refused to accept a “form over substance” argument to allow a homeowner to delay the prosecution of a lawsuit when he claimed no prejudice.

This case involved an association suing a member who installed hardwood flooring in his unit without applying for or obtaining approval.  Downstairs neighbors were complaining about excessive noise from above.  As required by law prior to filing suit, the Association sent Munoz a “request for resolution” which offered the opportunity to mediate prior to a lawsuit being filed.  Munoz did not reply to this offer to mediate within the 30 day time limit provided and did not communicate with the Board concerning the noise complaints.  The Association sued for an injunction and Munoz filed a technical challenge to the complaint alleging that the Association had not fully complied with Civil Code Section 5935.  That section requires the Association in conjunction with a request for resolution to provide the owner with a fully copy of the statutes relative to pre-litigation, alternative dispute resolution.  Munoz claimed that the notice he received did not include a full copy of the statute.

The appellate court found that the Association had indeed not provided Munoz with a full copy of the statute explaining the applicable laws concerning ADR.  However, the court pointed out that although this was a technical violation, Munoz did not claim he was prejudiced in any way by not receiving this full statute and noted that Munoz did not respond whatsoever to the notices and never complained to the Association that the full statute had not been supplied.  The court also noted that Munoz was an attorney and there was nothing to indicate he would have responded differently had the full text been provided.

  1. Tract 19051 Homeowners Association v. Kemp (2015) 2015 S.O.S. 1293

Why significant:       Clarifies that the prevailing party attorney fee provision in Civil Code Section 5975 (c) applies in certain circumstances even when a development is not actually a common interest development subject to the Davis-Stirling Act.

The Association filed a lawsuit against Kemp which alleged, among other things, that the Association constituted a common interest development as defined in the Davis-Stirling Act and therefore could enforce architectural restrictions in recorded CCRs.  At trial, the court determined that the subdivision was not a common interest development under the Act due to the fact that the CCRs recorded by the original developer had expired and the attempt to extend the CCR term was not effective. The trial court awarded attorneys fees to Kemp as a prevailing party under the Act and initially, the appellate court reversed that award.  Kemp appealed the reversal and upon a second look, the appellate court changed its mind about the attorneys fees.

The appellate court ruled that the prevailing party attorney fee provision in Section 5975 applied to allow Kemp’s fees because the intent of the statute was to award the prevailing party attorneys fees in an action brought to enforce governing documents or the Act.  The court’s decision that the Association was no longer a common interest development did not change the fact that the Association alleged that it was and sought remedies as if it was.  The court reasoned that if the Association had won the case, it would have been entitled to fees, then the fact that it did not prevail (for whatever reason) should not impair the defendant’s ability to the same award.

  1. Watts v. Oak Shores Community Association (2015) 2015 S.O. S 1565

Why significant:       Court approved the Association’s right to adopt rules which impose fees on members relating to short term rentals of property.

This 851 lot single family home development is situated on Lake Naciemento near Paso Robles.  Two owners sued the Association to stop collection of certain fees charged to owners in relation to short term/vacation rentals of their homes.  The owners contended that such fees were not reasonably tied to expenses incurred by the Association as required by former Civil Code Section 1366.1 and unreasonably interfered with the owner’s rights to lease out their property.  That section prohibits levy of fees or assessments other than those necessary to defray the Association’s expenses.

After a protracted trial, which involved much expert testimony concerning the correlation of the fees charged by the Association to owners who rented their homes, the court concluded that the Association had sufficiently demonstrated that the charges were reasonably related to the burdens created by rentals.  The court ruled that the Association’s burden was not to demonstrate an exact correlation, dollar for dollar, between the rental fees charged and the Association’s actual expenses.  The court found that the Association had established a good faith relationship between the fees and the amount of administrative and maintenance burden created by the short term rentals because it would have been impossible to tie exact expenses to the burden.  The trial court found that the fees were “roughly proportional” to the expenses incurred.

The court of appeals affirmed the decision and found that nothing in Section 1366.1 requires an exact correlation between a fee assessed and the costs for which it was levied, particularly where the cost of a study to determine the exact correlation by be prohibitively expensive or when the correlation would be impossible to determine.

Another salient part of this case was that the Association was awarded in excess of $1,000,000.00 against the plaintiffs.  The attorney for the plaintiffs was the husband of one of the owners.

  1. Legacy Villas at La Quinta Homeowners Association v. Centex Homes (2015) 9th Circuit Court of Appeals

Why significant:       This recently decided Federal Court case further clarifies the attorney client relationship and associated privilege in the context of Associations and Board of Directors.  This case held that attorneys hired by an Association whose Board consists of both members and employees of the Declarant/Developer represented the Association and not the Declarant for purposes of dis-qualification.

The plaintiff Association hired a law firm to represent the Association as general counsel.  The Developer (Centex Homes) appointed several of its employees as directors of the Association during the selling phase of the project.  In the course of acting as general counsel, the law firm regularly communicated with the Centex employees in the context of their serving on the Board of Directors.  After several years the control of the Association and Board was turned over to the membership and the Association filed several lawsuits against Centex (construction defects and breach of fiduciary duty) using the same law firm that had interacted with the Centex directors.

Centex removed the breach of fiduciary duty case to federal court and filed a motion to disqualify the law firm on the basis that it had a conflict of interest because it had communicated with and given advice to the Centex directors while they were on the board.  The court granted this motion.  However, the law firm continued to represent the Association in the state court construction defect case.

During the discovery phase of the federal court action, the management company inadvertently provided privileged material to Centex relative to both pending cases. The general counsel law firm contacted Centex’ attorneys about the mistakenly produced privileged information.  Centex’ attorneys complained to the federal judge, who then held the law firm in contempt based on the previous disqualification.  The judge found the attorneys in contempt.  The contempt order and disqualification order were appealed to the 9th Circuit Court of Appeals.

The appeals court found that the nature and content of the communications between the Centex directors and the law firm were limited in nature and quantity and that the attorneys learned of no confidential information about Centex and never paid any fees to the attorneys.  The court found that Centex, being a very experience developer had no reasonable belief that the law firm represented both the Association and Centex.  The appeals court reversed the disqualification order and the contempt order.

  1. Trilogy at Glen Ivy Maintenance Association v. Shea Homes (2015) 235 Cal. App. 4th 361)

Why significant:       Further interprets the murky application of the Anti-SLAPP statute in the context of Associations.

The Association and members filed suit against the developer alleging breach of fiduciary duty and unfair business practices relating to diversion of funds from the Association.  The developer filed a motion to dismiss alleging that the lawsuit was really an attempt to interfere with its rights of free speech.  The court found that the developer had not established that the Association’s suit stemmed from or was based on protected speech, instead finding that the developer controlled board owed fiduciary duties to the Association and its members and that the suit was a result of conduct, not speech.

Unpublished Case which is not a binding legal decision

Bel Air Ridge HOA v. Rosenberg

In a petition to have the Superior Court approve the amendment of CCRs based on less than the required supermajority, a group of members opposed the petition at least partially based on the fact that the Board had extended the voting period a number of times in an attempt to obtain sufficient votes to allow the amendment to achieve a supermajority.  The court found that extending the time period was not prohibited by law and was part of the reasonable efforts of the Board to provide members the opportunity to vote.

 

 

 

NEW LEGISLATION

  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. Civil Code Section 4735/AB 349:  Artificial Turf:  This law makes void and unenforceable any provision in governing documents or architectural guidelines that prohibited the use of artificial turf or other synthetic surface that resembles grass.
  3. Civil Code Section 5570/AB 596:Annual Budget/FHA and VA Certification Disclosure:            This bill would require the annual budget disclosure to contain a statement as to whether a condominium project is FHA or VA certified (which can impact sales and refinancing).
  4. Civil Code Section 4750.10/AB 1448:      Clothesline Bill/Solar Energy:     This law prohibits governing documents from effectively restricting the installation or use of a clothesline to dry clothes.  The law does recognize Association’s ability to impose reasonable restrictions and applies only to areas which a homeowner is entitled to use exclusively.
  5. SB 290:          Foreclosure Notice:           This bill would modify the procedure for service of a notice by an association to foreclose for non-payment of assessments to allow substituted service by serving the notice on an adult present at the address identified by the Owner to receive legal notices.  Currently, personal service on the Owner is required, which has resulted in many Owners avoiding personal service.
  6. Civil Code Section 1941.7/SB 655:          Mold:  This law proscribes standards for habitable buildings which could be applied to condominium projects relative to the existence of mold, which if violated could be charged as a misdemeanor.  This raises the possibility of an Association, a board or a manager being held responsible for mold in common areas.
  7. Pool Maintenance Regulations:             Title 22 of the California Code of Regulations have been modified impose certain obligations on operators of pools, including HOA’s larger than 24 homes.  These new requirements set parameters for water characteristics, require daily monitoring of pool facilities and record keeping, presence of specific safety and first aid equipment, require at least one keyless exit and impose health restrictions for employees and pool users.  Association Board’s will need to make sure that the pool maintenance vendors are up to speed on these testing and record keeping requirements and make sure that the required safety equipment is present.  Additionally, Association’s should consider posting a notice prohibiting use of the pool or spa by persons having an infectious communicable disease, which includes relatively minor ailments.
  8. AB 786:          Recycled Water      Existing law prohibits an association from fining or disciplining an owner for reducing watering or stopping watering landscaping during drought emergencies.  This law provides that an owner that receives recycled water from a retail water supplier but fails to use that water to irrigate landscaping may be fined or assessed by an Association for that failure.
  9. AB 807:          Recordation of Notice of Transfer Fees          Current law requires the entity imposing the transfer fee to record a specified document which describes the fee and calculation of same concurrently with the instrument’s recordation.  The new law makes unenforceable a transfer fee recorded against a property on or before December 31, 2007 which incorporates by reference another recorded document, such as CCRs, unless it is recorded against the property on or before December 31, 2016 in a single document that complies with Civil Code Section 1098.