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Canterbury Woods Homeowners Association v. Joaquin Hernandez et al


December 16, 2010


Appeal from a judgment of the Superior Court of Orange County, David R. Chaffee, Judge. Reversed and remanded. (Super. Ct. No. 07CC11331)

The opinion of the court was delivered by: Moore, J.

Canterbury Woods HOA v. Hernandez



California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.


Canterbury Woods Homeowners Association (Canterbury Woods or the HOA) sued former owners Joaquin Hernandez and Maria Cristina Rios (collectively defendants) for failing to pay homeowners association approximately $53,000 in assessments during their brief tenure. Following a bench trial, the trial court awarded the HOA some $15,000, without interest or late fees. The trial court found that a transaction between the association and a board member prior to defendants' ownership constituted a breach of fiduciary duty, and the HOA could not, therefore, levy assessments to fund the transaction. We find that as a matter of law, the trial court erred by finding that a past breach of fiduciary duty is a defense to an action for unpaid assessments, but acted within its discretion in denying the HOA's request for late fees and interest. We therefore reverse and remand for recalculation of the HOA's damages.



Canterbury Woods was originally built in the 1960's or 1970's. It comprises 18 apartment buildings, each consisting of four units, on one large lot in Westminster. In July 1996, the owners, Donald and Grace Modglin, recorded a subdivision map for the tract, subdividing it into 18 individually owned lots consisting of one fourplex each, and three common areas lots, A, B, and C.

A declaration of covenants, codes and restrictions (CC&R's) for Canterbury Woods was filed shortly thereafter. The CC&R's delegated maintenance responsibility for the common areas to the HOA, and created the power to levy assessments.

The CC&R's defined the "Common Area" of the association as property "owned by the Association in fee or by easement for the common use and enjoyment of all the Owners." It was defined as Lots A, B, and C as specified on the tract map. Article 14.4, entitled "Common Area Easements," stated that the "Association shall own the Common Area for the use, enjoyment and convenience of the Owners."

In 1998, the Modglins sold all 18 lots to a single buyer, Future Growth, Inc. (FGI). FGI did not, however, acquire the common areas. Instead, fee ownership was retained by the Modglins, and the HOA was to pay $7500 per month for an option to obtain title in the future. The structure, according to FGI shareholder Peter Starflinger, was "very attractive," because "[t]he price of the project was much lower than what it could be, basically was a form of helping to finance the project." Starflinger was also on the HOA board, from 1998 until late 2001, then from approximately late 2004 through the time of the instant lawsuit.

FGI later transferred title of 15 of the buildings to Starflinger, who then transferred title to a new limited liability company, Future Growth, LLC (Future Growth). Future Growth then sold shares representing ownership interests in the buildings to investors. Edwina Thoma bought the three buildings that were not purchased by Starflinger. In 2001, in order to proceed with improvements to the common area,*fn1 Starflinger purchased the common area and the HOA agreed to pay him a monthly fee in the form of a lease. At the time, Starflinger and Thoma were the two members of the HOA board of directors.

On September 15, 2001, the proposed agreement was presented at a meeting of all the building owners, including Starflinger, Thoma, and four other individuals who owned interests through Future Growth. The proposed option and lease obligated the HOA to pay Starflinger $8750 per month, in exchange for a right to purchase the common area lots at a later time, and construct improvements on the lots in the meantime. After discussion, the transaction was approved by those present. As of November 2001, the HOA dues were $1200 per month.

In February and March, 2002, defendants acquired lots 2 and 4 in foreclosure*fn2 for approximately $319,000 per building. Hernandez held an MBA degree from UCLA, and worked as a bank loan agent, and held a California real estate license. Residential real estate lending was his forte. While the property was in escrow, Hernandez received a preliminary title report showing the buildings were subject to CC&R's, and he later obtained a copy of the CC&R's. Hernandez processed his own loans for the properties through the mortgage company he was working for at the time. There was no documentation to show what the bank disclosed to Hernandez regarding HOA assessments.

Sometime after tenants began inhabiting defendants' buildings, Hernandez was contacted by West Management, the property management company, stating that $1200 per building was due for use of the common areas. The letter also asked Hernandez to submit a grant deed or escrow statement so that arrears could be computed. Although somewhat inartfully phrased, Hernandez correctly understood this to be a request for association dues, as his response stated: "In light of your request for parking and/or association fees, please remit legal evidence of your association . . . ."

Starflinger then confused matters by responding to Hernandez, in part, in July 2002: "WEST MANAGEMENT is handling the public areas, which are owned by Future Growth and German Investment. You do not own any portion of it. If you check your Title, you will find out this is correct. The reason we know this is, whom ever you bought the property from did not own it either. We own it. [¶] WEST MANAGEMENT is doing the management on our behalf and they are not authorized to give out any of our financial information, plus it is none of your concern. There is no association. Everyone who does not have VALID sticker on a vehicle . . . will be towed. Stickers will be issued once the monthly fee is paid to WEST MANAGEMENT for using our property."

Starflinger later testified this letter was sent out by someone in his office, and that he never read it. He described it as a "clumsy attempt" to collect HOA dues. Hernandez did not pay, however, and he testified that his tenants were told not to use the common areas. Despite the threats regarding parking, none of his tenants were actually towed.

Defendants sold one building in September 2002 and the other in October 2003. Based on computations from the county tax transfers, one property was sold for approximately $555,000 and the other for $656,000. Because the HOA had never filed a lien, defendants were able to sell without paying any amounts outstanding to the HOA.

Subsequently, the HOA filed the instant suit to recover some $53,000 in assessments, late fees, interest, and attorney fees. Hernandez filed an answer and cross-complaint for declaratory relief. The overlapping grounds for declaratory relief and the affirmative defenses asserted a number of reasons why the HOA was not entitled to collect the assessments. These reasons did not include a breach of fiduciary duty by Starflinger to the HOA.

The case went to bench trial in 2009. At the conclusion of trial, the court found that Starflinger had breached his fiduciary duty by acquiring the common area lots and charging the association a monthly rent under the lease/option agreements. The court found the lease was illusory and none of the assessments levied for payments on the lease were valid. The court calculated $15,597.99 as the appropriate amount of assessments for maintenance of the common areas during defendants' ownership. The court declined to award costs, finding the HOA could have obtained the judgment in a limited jurisdiction court. The court signed a statement of decision over the HOA's objections.



Standard of Review

Defendants argue we should uphold the judgment if it is based on substantial evidence, while the HOA asserts it is not challenging the trial court's factual findings, but its application of the law. The HOA has the better argument here. It claims the trial court erroneously found that a breach of fiduciary duty by a board member is a defense to an action to collect unpaid assessments, and this is a question of law, which we review de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799.) For any remaining questions of fact on which the trial court opined, we will uphold the trial court's conclusions if they are supported by substantial evidence. (Oregel v. American Isuzu Motors, Inc. (2001) 90 Cal.App.4th 1094, 1100.)

Collection of Unpaid Assessments

The parties, unsurprisingly, approach this case from completely different points of view. The HOA argues that Hernandez cannot challenge the 2001 transaction between it and Starflinger, because such a claim can only be asserted in a derivative action. Defendants spend much of their brief arguing that the CC&R's required the HOA to own the common area and since it leased the common area, it was not entitled to recover any portion of assessments that paid for the lease. Rather than attempt to individually parse these arguments that are, in essence, talking past each other, we instead approach the legal issues in a more straightforward manner.

Both parties rely on the CC&R's to support their arguments, and we therefore find the CC&R's as recorded in 1996 are valid and binding on the property owners. CC&R's are enforceable as equitable servitudes that run with the land. (Civ. Code, § 1354; Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 375.) Section 5.1 of the CC&R's gives the HOA the power to levy assessments.

When defendants purchased buildings in the HOA, they became obligated to pay assessments under the CC&R's. It is uncontroverted that the HOA did a poor job of collecting the assessments while defendants were owners, but it is equally uncontroverted that defendants knew there was an association and knew there were CC&R's. The remaining question, then, is whether there are any legal defenses that would relieve defendants of their obligation to pay the assessments.

The issue on which the trial court relied was whether the lease transaction between Starflinger and the HOA was valid. The trial court found that it was not, that the entire transaction was "illusory" and a breach of Starflinger's fiduciary duty. Even if this is true, however, we disagree with the trial court that such a breach constitutes a defense to an individual owner's obligation to pay assessments. Defendants were not owners at the time of the alleged breach -- had they been so, they would have had standing to seek relief on the HOA's behalf in a derivative action. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312.) They were not, however, and therefore lacked such standing. (Corp. Code, § 7710, subd. (b).)

Defendants cite no authority for the proposition that an earlier breach of fiduciary duty by a board member constitutes a defense to the payment of assessments due to the HOA. The case defendants do cite for the proposition that a derivative action is unnecessary, Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, does not support their argument. That case involved a situation where majority shareholders owed a fiduciary duty directly to minority shareholders, not to the corporation, and therefore an action directly challenging a transaction was permitted. Here, however, Starflinger did not breach a fiduciary duty owed directly to Hernandez, who was not even in the picture at the time of the transaction.

Defendants also argue that the HOA breached its CC&R's by not owning the common area in fee. This appears to be incorrect as a matter of law, as the CC&R's permit owning the common area "in fee or by easement for the common use and enjoyment of the Owners." Even assuming the HOA did breach its CC&R's, that is not a defense to an owner's obligation to pay assessments; courts have specifically rejected this idea based on the importance of assessments to the proper functioning of associations. (Park Place Estates Homeowners Assn. v. Naber (1994) 29 Cal.App.4th 427, 432.) Regardless of the validity of a homeowner's dispute with an association, refusing to pay assessments is not a valid remedy.*fn3 Further, a homeowner cannot, as defendants attempt to do, argue that payment of some portion of an assessment is illegitimate because an underlying transaction by the association was too costly, as long as the costs were actually incurred. (Brown v. Professional Community Management, Inc. (2005) 127 Cal.App.4th 532, 538-539.)

Finally, to the extent that defendants argue that the HOA did not have the authority to enter into the lease with Starflinger, we must disagree. There is no evidence supporting this contention. Rather, the trial court heard that the purpose of the transaction was to permit the HOA to make improvements to the common areas, which could not be undertaken under the option agreement with the Modglins that was in place at the time. The CC&R's give the HOA the authority to use assessments for "the improvement[,] operation and maintenance of the Common Areas." Therefore, unlike the cases defendants cite, there is no evidence the HOA was acting in excess of its legal authority.

There is no doubt that the HOA did a poor job of meeting its statutory obligations to levy and collect assessments during the time defendants' owned the subject property. But there is also no doubt that defendants knew about the CC&R's and were aware, from the time the management company sent the initial letter, that the collection of assessments was being attempted. The HOA's ineptitude is not a defense to defendants' duty to pay assessments, and we find no other pertinent legal points raised by defendants. Therefore, we conclude the trial court erred, as a matter of law, by failing to award the HOA the full amount of assessments due during defendants' ownership.

Interest and Late Fees

The HOA claims they are also entitled to a $10 late fee per unit per month, as well as prejudgment interest of 11 percent. Civil Code section 1366, subdivision (e), governs late fees and interest in such cases: "Regular and special assessments levied pursuant to the governing documents are delinquent 15 days after they become due, unless the declaration provides a longer time period, in which case the longer time period shall apply. If an assessment is delinquent the association may recover all of the following: [¶] . . .[¶] (2) A late charge not exceeding 10 percent of the delinquent assessment or ten dollars ($10), whichever is greater, unless the declaration specifies a late charge in a smaller amount, in which case any late charge imposed shall not exceed the amount specified in the declaration. [¶] (3) Interest on all sums imposed in accordance with this section, including the delinquent assessments, reasonable fees and costs of collection, and reasonable attorney's fees, at an annual interest rate not to exceed 12 percent, commencing 30 days after the assessment becomes due, unless the declaration specifies the recovery of interest at a rate of a lesser amount, in which case the lesser rate of interest shall apply." (Italics added.)

According to the HOA, the word "may" in the initial paragraph does not mean that the trial court has discretion as to whether to award late fees and interest, but that it is the association that has the discretion as to whether to seek such monies. Unsurprisingly, the HOA cites no authority in support of this proposition, and we reject it on its face. Nothing in the statute suggests that the award of late fees and interest is mandatory at the association's election. Other statutes use similar language yet do not mandate recovery. For example, Civil Code section 3294, subdivision (a), which discusses the recovery of punitive damages, states that a plaintiff "in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant." (Italics added.) The plaintiff's election is to choose to seek punitive damages; it does not follow that the plaintiff is automatically entitled to such damages. Similarly, while the HOA is entitled to seek late fees and interest under Civil Code section 1366, if the Legislature had intended to make such an award mandatory, the statute would have used the word "shall" rather than "may."

Given all of the facts of this case, we conclude the trial court did not abuse its discretion by declining to award late fees and interest. While the evidence showed that defendants were aware of the existence of the CC&R's and attempted to use the inept management of the HOA to their advantage, the fact remains that the HOA was, indeed, inept. It failed to send out bills or statements, and even at one point attempted to deny that an association existed. It failed to file a lien against defendants, which would have resulted in the resolution of this matter long ago. As a result, the court was well within its discretion to deny the HOA late fees and interest.



The judgment is reversed, and the matter is remanded for recalculation of the HOA's damages. The HOA is entitled to its costs on appeal.


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