Palm Springs Villas II Homeowners Association, Inc. v. Parth

         APPEAL from a judgment of the Superior Court of Riverside County No. INC1202588, John G. Evans, Judge.

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[Copyrighted Material Omitted]

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         COUNSEL

         Epsten Grinnell & Howell, Anne L. Rauch and Joyce J. Kapsal for Cross-complainant and Appellant.

         Kulik Gottesman & Siegel, Leonard Siegel, Thomas M. Ware II and Francesca N. Dioguardi for Cross-defendant and Respondent.

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         OPINION

         AARON, J.

         I

         INTRODUCTION

         The Palm Springs Villas II Homeowners Association, Inc. (Association) appeals from a judgment entered in favor of Erna Parth, in connection with actions she took while simultaneously serving as president of the Association and on its board of directors (Board). The court granted Parth's motion for summary judgment as to the Association's claim for breach of fiduciary duty on the basis of the business judgment rule and an exculpatory provision contained in the Association's declaration of covenants, conditions, and restrictions (CC&Rs). The court had previously sustained Parth's demurrer to the Association's claim for breach of governing documents without leave to amend, finding that the Association failed to allege a cognizable breach.

         On appeal, the Association argues that the trial court erred in its application of the business judgment rule and that there remain material issues of fact in dispute regarding whether Parth exercised reasonable diligence. We agree that the record discloses triable issues of fact that should not have been resolved on summary judgment. We therefore reverse the judgment in favor of Parth. The Association also contends that it stated a claim for breach of the governing documents and that the court erred in sustaining Parth's demurrer. We conclude that the document cause of action is, at best, duplicative of the fiduciary breach cause and affirm the ruling sustaining the demurrer as to that cause of action without leave to amend.

         II

         FACTUAL AND PROCEDURAL BACKGROUND^[1]

         A. Background on Palm Springs Villas II and its governance

         The Association is the governing body for Palm Springs Villas II, a condominium development, and is organized as a nonprofit corporation under California law. The Board, comprised of five homeowners or their agents, governs the Association. The Association's governing documents include the CC&Rs and its bylaws. Each homeowner is an Association member and is required to comply with the terms set forth in these documents.

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         Certain provisions reserve to the Board the authority to take particular actions. Article VI, section 3, of the CC&Rs provides that the Board "shall have authority to conduct all business affairs of common interest to all Owners." Article VI, section 1, of the bylaws describes the Board's powers, including to "contract... for maintenance, ... and services" and to "borrow money and incur indebtedness... provided, however, that no property of the association shall be encumbered as security for any such debt except under the vote of the majority of the members entitled to vote...."

         Other provisions limit the Board's power and retain authority for the members. Article VI, section 1, of the bylaws explains that "[n]otwithstanding the foregoing, the Board shall not, except with the vote or written assent of a majority of the unit owners... [e]nter into a contract with a third person wherein the third person will furnish goods or services for the common area or the association for a term longer than one year...." Article XVI, section 2, of the CC&Rs, provides that "[n]otwithstanding any other provision of this Declaration or the Bylaws, the prior written approval of at least two-thirds (2/3) of the... Owners... shall be required" for actions including "the... encumbrance, ... whether by act or omission, of the Common Area...."

         The CC&Rs also contain an exculpatory provision. Article VI, section 16, provides: "No member of the Board... shall be personally liable to any Owner, or to any other party, including the Association, for any damage, loss or prejudice of the Association, the Board, the Manager or any other representative or employee of the Association, or any committee, or any officer of the Association, provided that such person has, upon the basis of such information as may be possessed by him, acted in good faith, and without willful or intentional misconduct."

         During the relevant time, Parth was president of the Association, as well as a Board member.

         B. Events leading to breach allegations

         1. Roofing repairs

         In 2006, the Board hired AWS Roofing and Waterproofing Consultants (AWS) in connection with roofing repairs, with the intention that AWS would vet the companies submitting bids and perform other tasks related to the repairs. According to Parth, AWS prepared a budget estimate for the repairs, the Board submitted a request to the members for a special assessment to offset these costs, and the members voted against the request. Parth then found and retained a roofing company on her own, without consulting either the Board or AWS.

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         Parth indicated that she tried to contact the roofing company that had previously worked on the roofs, but it was no longer in business, and that she could not find another roofer due to the Association's financial condition. She obtained the telephone number for a company called Warren Roofing from a contractor that was working on a unit. The record reflects that the person Parth contacted was Gene Layton. At his deposition, Layton stated that he held a contractor's license for a company called Bonded Roofing and that he had a relationship with Warren Roofing, which held a roofing license. When asked about that relationship, Layton explained that on a large project, he would be the project manager.

         At Parth's deposition, Association counsel asked Parth if she had investigated whether Warren Roofing had a valid license. She replied, "[h]e does and did and bonded and insured." Counsel clarified "[t]here's a Bonded Roofing and Warren Roofing. Who did you hire?" Parth responded "One Roofing. That's all one company, I think." Counsel then asked if she had "investigate[d] whether Bonded Roofing was licensed, " and Parth answered, "I did not investigate anything."

         According to a June 2007 Board resolution, the Board hired Bonded Roofing to work on a time and materials basis. Layton said that he never met with the Board in a formal meeting or submitted a bid for the work before he started work on the roof. The Association had no records of a written contract with Bonded Roofing or any other roofer.

         Warren Roofing submitted invoices and was ultimately paid more than $1.19 million for the work. Many of the checks were signed by Parth. Layton stated that "Bonded Roofing had nothing to do with the money on this job" and that he was paid by Warren Roofing. Board member Tom Thomas indicated that no invoices from Warren Roofing were included in the packets provided to the Board members each month, and Board member Robert Michael likewise did not recall having seen the invoices. Parth explained that she relied on Board member and treasurer Robert ApRoberts, a retired certified public accountant, to review invoices. Larry Gliko, the Association's contracting expert, opined that the invoices submitted by Warren Roofing were "not at all characteristic" of those typically used in the building industry or submitted to homeowners' associations, included amounts that Gliko viewed as unnecessary, and charged the Association "almost double" what the work should have cost. Gliko also opined that "the work performed by Warren Roofing [was] deficient, " "fell far below the standard of care, " and "require[d] significant repairs."

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         2. Repaving projects and loans

         In April 2007, the Board voted to hire a construction company to repair the walkways. The Board asked the membership to vote on a special assessment to fund this and other repairs. The membership voted to approve the special assessment.

         In July 2007, Parth signed promissory notes for $900, 000 and $325, 000, secured by the Association's assets and property. She stated that at the time the special assessment was approved, the Board was investigating the possibility of obtaining a loan to raise the capital needed to immediately commence work on the walkway project. Thomas indicated that, as an Association member, he was never asked to approve the debt and did not learn about it until this litigation commenced. The Association had no records indicating that the members were ever informed about, or voted on, the debt.

         In April 2010, the Board approved a bid from a paving company to perform repaving work. According to Parth, the Board elected to finance this repaving project with a bank loan, the Board reviewed the loan at the April 2010 meeting, and "unanimously approved" that Parth and/or ApRoberts would sign the loan documents. Parth further stated that at a special Board meeting in May 2010, attended by her, ApRoberts, and Board member Elvira Kitt-Kellam, the Board "resolved that the Association had the power to borrow and pledge collateral" and authorized her and ApRoberts to execute loan documents. Thomas stated that he never received notice of this meeting. In May 2010, Parth and ApRoberts signed a promissory note for $550, 000, secured by the Association's accounts receivable and assets. Thomas indicated that he was never asked to vote on this debt and, again, there were no Association records indicating that the members were notified about or voted on it.

         In construction and business loan agreements in connection with the 2007 and 2010 notes, Parth and ApRoberts represented that the agreements were "duly authorized by all necessary action by [the Association]" and did not conflict with the Association's organizational documents or bylaws. Parth testified at her deposition that she had not reviewed the CC&Rs or Bylaws regarding her authority to execute a promissory note and did not know whether she had such authority under the CC&Rs. In her declaration in support of summary judgment, Parth explained that she believed she "had authority to borrow money and execute loan documents on behalf of the Association in [her] capacity as president, " and was "unaware that a vote of the majority of the members was required in order to pledge the Association's assets as security for the loan." She also indicated that "no one advised [her] that she did not have authority to sign the loan documents... or that a vote of the membership was required."

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         3. Jesse's Landscaping

         At a December 2010 Board executive meeting attended by Parth, Michael, and Kitt-Kellam, those Board members approved and signed a five-year contract with Jesse's Landscaping. Thomas indicated that he was not given notice of the meeting. At her deposition, in response to a question regarding whether she had the authority to sign a five-year contract, Parth answered, "I don't know." During the same line of questioning, Parth also acknowledged that her "understanding of what [her] authority is under the bylaws" was "[n]one."

         4. Termination of Personalized Property Management

         During the relevant time period, the Association's management company was Personalized Property Management (PPM). According to Parth, PPM's owner advised her in or around June or July 2011 that PPM no longer wanted to provide management services for the Association. At a July 9, 2011 Board meeting regarding termination of PPM, the Board tabled any decision to terminate PPM until bids from other companies were obtained and reviewed. Parth proceeded to hire the Lyttleton Company to serve as the Association's new management company. Thomas stated that he never received written notice of a Board meeting to vote on the hiring of Lyttleton. Parth noticed an executive meeting for July 16, 2011, to discuss termination of PPM and retention of a new company, at which time the Board voted three to two to terminate PPM. Thomas stated that he objected to the vote at the time, based on the Board's prior decision to table the matter.

         5. Desert Protection Security Services contract

         Gary Drawert, doing business as Desert Protection Security Services (Desert Protection), had provided security services for Palm Springs Villas II since 2004. The Association executed a written contract with Desert Protection in December 2003 for one year of security services. Thomas stated that after joining the Board, he learned that Desert Protection and other vendors were providing services pursuant to "oral or month-to-month agreements." In July 2010, the Board authorized Thomas to obtain bids from security companies to provide security services for 2011.

         In January 2011, Parth signed a one-year contract with Desert Protection. Her understanding was that "any contract that was not renewed in writing would... be automatically renewed until terminated" and that she was

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"merely updating the contract, as instructed by management."^[2] She believed that she had the "authority to sign the contract as the Association's president." She further explained that, at the time, the Board had not voted to terminate Desert Protection and ...