California Court of Appeals, Fourth District, First Division
PALM SPRINGS VILLAS II HOMEOWNERS ASSOCIATION, INC., Cross-complainant and Appellant,
ERNA PARTH, Cross-defendant and Respondent.
from a judgment of the Superior Court of Riverside County No.
INC1202588, John G. Evans, Judge.
[Copyrighted Material Omitted]
Grinnell & Howell, Anne L. Rauch and Joyce J. Kapsal for
Cross-complainant and Appellant.
Gottesman & Siegel, Leonard Siegel, Thomas M. Ware II and
Francesca N. Dioguardi for Cross-defendant and Respondent.
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.
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.
AND PROCEDURAL BACKGROUND
Background on Palm Springs Villas II and its
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
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...."
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...."
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
the relevant time, Parth was president of the Association, as
well as a Board member.
Events leading to breach allegations
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.
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.
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
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.
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."
Repaving projects and loans
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.
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.
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.
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."
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."
Termination of Personalized Property
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.
Desert Protection Security Services
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.
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
"merely updating the contract, as instructed by
management." 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