Court Whacks Directors with a $500,000 Attorney Fee Award!
(And , the jury said they weren't negligent!)
This actually happened in Ritter & Ritter v Churchill Condominium Association (decided August 21, 2008). The case is also the newest judicial statement on the scope of an association's duty to maintain common area and its rules are a “must know” for all community association directors and managers of condominiums as well as planned developments and co-ops. We suspect many of the case facts will be familiar:
An owner complained about cigarette smells coming from other units. Experts determined that the odors were coming from holes in the common area concrete slabs that separated one floor from another in this 111 unit mid rise condo project. The experts also said that the existence of the holes posed a “significant” fire safety risk. Although these “slab penetrations” violated the building code when the project was constructed, they were not “caught” by building officials then or when the project was later converted to condominiums. The owners of two adjoining units (a trust) who were remodeling their units demanded that the board fix the problem; the board refused and demanded that the owners do so based on a bid it obtained indicating the cost was $4,070. When the owners refused, the board started imposing fines of $200 per day.
Who was sued for what?
The owner sought an injunction forcing the association to repair the slab problem, for damages of $200,000 for diminution in value and, at the end of trial, for attorney fees of $531,000.00!. And if that were not enough, the owner demanded a court order requiring the association to fix all of the slab penetration problems throughout the project.
The association sued back, filing a cross complaint for its own injunction requiring the owner to seal the slab underneath its units. It also sued to recover $77,000 in fines plus its own attorney fees of $775,000.00!
What did the Jury, the Judge and the Membership do?
Based on the facts, the Jury determined that the association was “negligent” and breached the CC&Rs by failing to fix the slab; that the plaintiff was 25% responsible for the problem and that the directors breached no duties. The Jury rendered an award of $4,620 for loss of value.
The Judge then made these legal rulings: that the association should immediately fix the slab under plaintiff's units and that a membership vote be taken on whether all other units in the building should be repaired. The board had the unit fixed and conducted the vote; of the project's 110 units, 81 votes were cast; of those, 78 voted against repairing the project and 1 (other than plaintiff) voted in favor. The board also adopted an architectural control policy requiring that owners remodeling their units must add fire stopping beneath their units. The trial court also ordered the association and the directors to pay the plaintiffs' attorneys' fees in the amount of $531,159.00.
Why were the Directors liable for legal fees if they did nothing wrong?
The prevailing party in a suit to enforce the CC&Rs is entitled to an attorney fee award. So, the question was whether plaintiff prevailed and if so, against whom. The association and the directors argued that the main relief sought by the plaintiff was the repair of the entire project (which they said was the main objective of their defense and why the case became so “intense”). The appeals Court affirmed the trial court's conclusions that the owners prevailed simply because the jury found the association “negligent,” and determined that the owner was not liable for the fines or to fix the slab and also because the trial court itself granted the injunction that forced a vote on the issue.
The appellate court refused to consider “allocation” arguments (as between the association and the directors) because those arguments were not properly raised on appeal; the Court apparently did conclude, however, that fees against the directors were proper because the association could act only through its directors.
Maintenance, the Business Judgment Rule and Attorney Fees
What led to liability in Churchill was that the board did nothing to carry out the association's duty to maintain common area. We can compare this to the famous Lamden1 case in which that board considered various methods of repairing termite problems and determined that limited spraying was preferable over tenting of the building. The Court refused to “second guess” that determination, concluding that good faith decisions concerning ordinary maintenance activities are best left to the board (this principle applies to things like the decision to replace a roof or patch it; to slurry seal or reconstruct a road; to paint this year or next). By contrast, in Churchill, the board did not weigh or implement repair alternatives; it simply refused to act at all. Under Churchill, there was no basis for “judicial deference” to the board's repair choice because there wasn't one.
Is it an anomaly that the association was liable, but the directors were not liable for the owners' damages (other than the attorney fees)? The Court indicated that it was not: that the “business judgment” rule protects directors from liability even when (as in this case) they acted in good faith but erroneously (because they didn't authorize the association to make the fire stop repair). Thus, in some situations, directors may not be held liable though the Association itself might.
1 Lamden v La Jolla Shores Clubdominium hoa; (1999) 21 Cal.4th 249.