In Ritter & Ritter, Inc. v. Churchill Condominium Assn., (— Cal.Rptr.3d —, 2008 WL 2807618, Cal.App. 2 Dist., July 22, 2008), a California Court of Appeal considered whether a trial court erred when it found a homeowner’s association, but not its directors, liable and subject to an injunction for failure to fix holes in the building which were allowing smoke odors into a homeowner’s units. The California Court of Appeal concluded that the trial court did not error when it found the homeowner’s association liable for damages and subject to an injunction.
Churchill Condominium Association (“Churchill”) is a thirteen story condominium building located in the Westwood area of Los Angeles, California. Churchill is a California Non-Profit Mutual Benefit Corporation which has a board of directors (“the Board”) made up of individuals that are owners of units in the condominium; the Board members receive no compensation for their services. Roberta Ritter is the trustee of Ritter & Ritter, Inc., Pension and Profit Plan, and Ritter and Ritter Family Investment Trust (“the Ritters”). Ritter purchased two adjoining units in Churchill, unit 3H in 1995 and 3J in 1998.
Churchill was built and completed in 1962 as an apartment complex, but in 1976 the building was converted into a condominium association. The CC&R’s were recorded in 1976, and together with House Rules documents, governed the association. Each floor of Churchill is constructed with a series of horizontal concrete slabs. There is a drop ceiling on each floor which leaves space between the above concrete slab and the drop ceiling for plumbing and piping to serve the individual units. Each concrete slab contains holes to accommodate the plumbing and piping that moves vertically through the building.
In 1998, the Ritters complained of smoke odors in unit 3H, and shortly thereafter discovered similar problems in unit 3J. The Ritters were told the problem originated in their air conditioning unit, and that the unit needed to be replaced. The Ritters replaced the air conditioning unit but the smoke odors persisted. In 2003, a new tenant in the Ritter’s unit 3J complained of the smoke odor. The Ritters demanded that Churchill identify the source of the odor and abate it. The Ritters hired an engineer to investigate the odors, and the engineer reported that the source of the problem was the holes in the concrete slabs and in his opinion the holes constituted a fire hazard and should be filled or fire stopped. The Board hired their own engineer who, for the most part, arrived at the same conclusion as the Ritters’ engineer.
After considering the reports, the Board concluded that fixing the holes in the concrete slab was the responsibility of the Ritters, and that the Ritters were compelled to do so based on the Ritters’ recent remodel of the units and the 1999 Building Code. The Ritters demanded a hearing before the Board which was granted. The Board’s conclusion did not change and further concluded that based on the CC&R’s, the Ritters were required by law to fill the holes adjacent to their own units. The Board imposed daily fines of $200 per day on the Ritters for failure to fill the holes.
In May, 2004, the Ritters sued Churchill and its directors individually claiming nuisance, negligence, breach of fiduciary duty, breach of the CC&R’s, breach of the covenant of good faith and fair dealing, permanent injunctions and declaratory relief. Specifically, the Ritters sought damages due to the odor intrusion into their unit, $200,000 for diminution of value of their units for the unfilled holes, and an injunction requiring Churchill to fill all the holes throughout the building. Churchill cross-complained seeking to have the Ritters fill the holes adjacent to their units, and also for recovery of the accumulated daily fines that had reached $77,000. A jury awarded the Ritters $4,620 in damages but found the individual board members not liable. The trial court ordered Churchill to fill the holes adjacent to the Ritters’ units and required the Board to hold a meeting of all association members to inform them of the presence and potential damagers associated with the presence of the holes. The Board complied in filling the holes and holding the meeting. Churchill appealed the trial court’s decision.
The Court of Appeal began by discussing the general principals relating to condominium associations. Condominiums, under California law, are common interest developments where individuals own their separate space called a unit, and the common area of the condominium is owned by the separate owners as tenants in common. Condominium associations have agreements regulating the administration and maintenance of the property such as CC&R’s. There is also a homeowner’s association, governed by a board of directors, which manages and maintains the development’s common areas.
Homeowner’s associations have a duty to maintain the property in a “reasonably safe condition.” An Association must also “act toward [its] tenant as a reasonable person under all of the circumstances.” In considering the liability of a homeowner’s association, courts review on a case by case basis to determine the degree of control exercised by the association. Directors on the board of a homeowner’s association may also be liable for their conduct in connection with the association. However, under the Lamden “judicial deference rule,” courts defer to the decision of homeowner’s associations boards regarding the maintenance and repair of common areas. Lamden v. LaJolla Shores Clubdominium Homeowner’s Ass.n (1992) 21 Cal.4th 249.
California also has a statutory business judgment rule which absolves directors’ of liability if they act in “good faith,” perform their duties “in a manner believed to be in the best interests of the corporation,” and perform their duties as “an ordinary prudent person in a like position would . . . under similar circumstances.” If a director does not run afoul of these provisions, his or her decisions will be presumed to be “based on sound business judgment,” and the presumption can only be overcome by a factual showing of “fraud, bad faith or gross overreaching.”
Churchill argued that the trial court erred because of an inconsistency in the jury’s response to special interrogatories and the general verdict. Specifically, the jury found that Churchill was liable for damages, but found that each of the directors was not liable; a discrepancy Churchill claimed needed to be harmonized by the trial court by directing a verdict for Churchill because Churchill could not be liable if the directors representing it were not. The Court of Appeal disagreed and said that “the liability of the Churchill is separate and distinct from the personal liability of the directors.”
Churchill also argued that the trial court should have deferred to the Board’s good faith decision of whether to undertake building improvement projects. The Court of Appeal posited that Churchill misapprehended the meaning of the judicial deference rule which only applied to the personal liability of board of directors, and not the decisions of homeowner’s associations in general. In addition, Churchill argued that the injunctive order was wrong because it was not supported by a finding of wrongdoing. The Court of Appeal was not persuaded and again attributed Churchill’s argument to a misunderstanding of the judicial deference rule. The court explained that the trial court’s decision to issue an injunctive order is not bound by the findings of the jury in connection with the personal liability of the Board members.
Finally, the Court of Appeal discussed issues relating to attorney’s fees and the prevailing party determination. The trial court found that the Ritters’ were the prevailing parties and were therefore entitled to 100% of all attorney fees and other costs associated with the litigation totaling $531,159. Churchill argued that the trial court’s finding was error because none of the directors were found liable, and Churchill was not required to fix all of the holes in the building, and therefore Churchill “prevailed on the issues of greatest importance in the case.” The Court of Appeal disagreed and pointed to the Ritters’ award of monetary damages and the trial court’s order requiring Churchill to fix the holes adjacent to the Ritters’ units.
In conclusion, the Court of Appeal found that the trial court did not error in ordering the injunction and that the Ritters were the successful party in the litigation and were therefore entitled to $531,159 in attorney fees and other related costs.