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San Simeon Condominium Assn. v. 2006, 2007 Bd. of Directors

California Court of Appeals, Second District, First Division
Jul 29, 2008
No. B204041 (Cal. Ct. App. Jul. 29, 2008)

Opinion

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. YC053965, Ramona G. See, Judge.

Patricia H. Powell for Plaintiff and Appellant.

Kulik, Gottesman, Mouton & Siegel, Craig S. Berman, Leonard Siegel and Joseph R. Serpico for Defendants and Respondents.


NEIDORF, J.

Retired Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

A condominium owner sued the condominium association, its board of directors, and officers purportedly on behalf of the condominium association. The condominium owner charged the association’s board members and officers with misfeasance, election fraud, misappropriation of association funds, inappropriate assessments, and other wrong doing. Ultimately, the trial court sustained the defendants’ demurrer to the condominium owner’s second amended complaint without leave to amend on the grounds that she had failed to comply with the statutory provisions for pursuing a derivative action on behalf of the association and because she had continued to fail to name herself as plaintiff in order to pursue her personal claims against the association and its officers. We affirm.

FACTUAL BACKGROUND

San Simeon is a 71-unit condominium complex located on the Esplanade in Redondo Beach. San Simeon is a nonprofit mutual benefit corporation /common interest development governed by the board of directors of the San Simeon Condominium Association (Association).

Patricia H. Powell is an absentee owner of unit 11 in the San Simeon condominium complex. Powell has been leasing her unit to a series of tenants. Powell is a licensed attorney.

Beginning in 2002 Powell began to complain to the Association’s board of directors about the Association’s decision to impose special assessments on condominium owners in order to purchase earthquake insurance. Over the years Powell’s complaints to the Association and its board members expanded to include a litany of individual concerns. By way of example, Powell complained that someone acting at the board’s direction “stole” a microwave and telephone from her vacant unit after a tenant moved out. Powell complained she had been inappropriately charged “move in /move out” fees when her tenants changed. Powell protested about being prohibited from parking in a spot near the door and elevators the Association had reserved for the exclusive use of the Association’s workers. Powell was upset the Association’s president kept a mailbox key to her unit and used it to remove mail after Powell’s tenants vacated her unit. Powell later complained about the Association’s decision to continue special assessments to purchase earthquake insurance, claiming the decision had not been put to a vote by all unit owners.

Powell sought a court order ex parte imposing a stay on collection of assessments the Association levied to purchase earthquake insurance and directing reimbursement to homeowners for assessments already paid. The Association’s president filed opposition to the ex parte motion supported by her declaration explaining that the duly-elected board had approved the assessment and that the Association had already paid the premium for the challenged earthquake coverage. The trial court denied Powell’s ex parte request.

Powell believed the Association’s board members were guilty of financial improprieties, manipulating elections to perpetuate themselves in office, and other nefarious acts to cover up their alleged self-dealing and defalcations. In October 2006 Powell filed a lawsuit, as an “owner/representative,” on behalf of the Association. The defendants in the lawsuit Powell filed were: the “2006 Board of Directors”, the Association, and Association officers Laverne Boethling, President, Jack Earle, Vice President, Fred Burch, Treasurer, Charles Williams, Secretary, Member Greg X. Gansert, and Does 1 through 10 (collectively “defendants” unless the context requires otherwise). The complaint purported to state 14 separate causes of action. The complaint sought as remedies (1) a court order impounding the Association’s funds; (2) an audit of the Association’s finances by an outside accounting firm; (3) appointment of an independent professional management firm to operate the Association; (4) enforcement of the governing documents and statutes; (5) restitution to Association members; (6) judicial oversight of the Association’s upcoming election to select the Association’s officers and board members; and (6) attorneys fees and costs for prosecuting “this shareholder derivative action.”

The defendants filed a motion for judgment on the pleadings (Code Civ. Proc., § 438) on the grounds the allegations of the complaint were “rambling”, “nonsensical”, “ambiguous” and “failed to state a cause of action”. (Code Civ. Proc., § 430.10.) In addition, the defendants argued Powell had not followed proper procedures to pursue a derivative action on behalf of the Association; Powell’s individual claims were defective because she did not name herself as plaintiff; and some of the alleged causes of action purported to assert both individual and Association claims and for this reason were ambiguous.

At the hearing on the motion Powell identified herself as an “owner representative of San Simeon Homeowners’ Association,” and claimed she “represent[ed] the Association.” Powell asserted the “Association is suing its board and in a representative capacity I am here.” The court stated its tentative decision was to grant the defendants’ motion. The court found the complaint defective and, by way of example, cited the fact Powell “did not name herself as the derivative. She instead named herself the San Simeon Homeowners’ Association itself, and has compounded the problem by suing the homeowners’ association. In one instance the San Simeon Condominium Association is suing itself. That’s one problem.” The trial court then reviewed in detail with Powell the various pleading flaws in her complaint. The court explained Powell had failed to plead compliance with the various statutory requirements for pursuing a derivative action on behalf of the Association. The court also explained how and why Powell’s various purported claims failed to state a cause of action. For example, the court explained how Powell had erroneously combined individual claims with claims purportedly asserted on behalf of the Association, explained how claims of breach of fiduciary duty and fraud required specific factual allegations against specific identified persons, and the like. In an explanation requiring five pages of reporter’s transcript, the trial court painstakingly detailed each of the numerous procedural and substantive flaws in Powell’s complaint. The trial court took the matter under submission and ultimately granted the defendants’ motion with leave to amend. In its written order the trial court again reviewed the specific defects in Powell’s complaint.

Powell filed a first amended complaint she designated a “member-representative suit” with the Association again the named plaintiff. Powell’s first amended complaint added as a defendant the Association’s “2007 Board of Directors.” The defendants demurred to the first amended complaint on the grounds, among others: (1) the “2006, 2007 Board of Directors” does not exist as an entity and was thus erroneously included as a defendant; (2) Powell had still failed to satisfy the statutory requirements for pursuing a derivative action on behalf of the Association; (3) the first amended complaint continued to assert personal claims yet Powell had still not included herself as a plaintiff; and (4) none of Powell’s claims were clear enough to state a cause of action.

The trial court sustained the defendants’ demurrer to Powell’s first amended complaint with leave to amend even though Powell had failed to cure the defects the trial court identified in its earlier rulings. In its minute order for the day, the trial court found Powell’s complaint “defective for the following reasons: (1) San Simeon Condominium Association cannot be both a plaintiff and a defendant in a derivative lawsuit; (2) San Simeon Condominium Association cannot be a named plaintiff in a derivative complaint; (3) [Powell] improperly combined claims belonging to the San Simeon Association with claims belonging to [Powell] personally; (4) [Powell] failed to comply with California Corporations Code § 7710(b) [requirements for bringing a derivative suit]; (5) [Powell] failed to comply with California Rules of Court, rule 2.112 [guidelines for properly stating a cause of action]; and (6) all 16 causes of action asserted in the first amended complaint failed to state facts sufficient to constitute said causes of action. California Code of Civil Procedure § 425.10 [requiring a statement of facts constituting the cause of action in “ordinary and concise language”].”

Powell filed a second amended complaint which again named the Association as the plaintiff. The complaint again failed to name Powell as plaintiff in order to properly assert her individual claims against the Association and its officers. Nor did Powell’s second amended complaint allege facts showing compliance with the statutory requirements for filing a derivative suit on behalf of the Association. In her second amended complaint Powell continued to assert she had standing to file suit on behalf of the Association in her capacity as a “member-representative” of the Association.

At the hearing on the defendants’ demurrer the trial court informed Powell, “The problem that you have in this case is that I have given you basically a road map of the issues that you needed and the defects you needed to resolve in your complaint. [¶] You have now filed this on three occasions, that is why it is being sustained [without] leave to amend at this point, because you don’t seem to be capable of amending this complaint in the appropriate way, and I can only give you so many opportunities to do so. You are absolutely right. This case has been pending for a number of months, and I think I have been more than patient in trying to allow you the opportunity to do so.”

In response, Powell requested leave to file a third amended complaint to assert a claim against the Association’s insurer on behalf of the Association for bad faith insurance practices (Ins. Code, § 790.03). The trial court denied Powell’s request. The court then sustained the defendants’ demurrer without leave to amend and dismissed the action.

Powell moved for reconsideration and submitted a proposed third amended complaint. Powell also filed several motions requesting court-ordered audits of the Association’s finances. The trial court denied Powell’s motions and requests.

Once the trial court sustained the defendants’ demurrer to Powell’s second amended complaint without leave to amend Powell could not revive or attempt to continue the action by filing motions requesting court-ordered audits. (See Killian v. Millard (1991) 228 Cal.App.3d 1601, 1606 [“‘A motion is not an independent right or remedy; it is confined to incidental matters in the progress of a cause. A motion relates to some question that is collateral to the main object of the action and is connected with and dependent upon the principal remedy. [Citation.] It is not consonant with regular procedure to raise in a motion wholly distinct and independent matters which generally should be the subject of a formal petition or complaint. [Citation.]’ [Citation.]”].)

DISCUSSION

Standard of Review

A demurrer tests the legal sufficiency of the complaint, and the granting of leave to amend involves the trial court’s discretion. Therefore, an appellate court employs two separate standards of review on appeal. (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879.) First, the complaint is reviewed de novo to determine whether it contains sufficient facts to state a cause of action. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) In doing so, we accept as true the properly pleaded material factual allegations of the complaint, together with facts which may be properly judicially noticed. Reversible error exists only if facts were alleged showing entitlement to relief under any possible legal theory. (Crowley v. Katleman (1994) 8 Cal.4th 666, 672.)

Second, on review of the trial court’s refusal to grant leave to amend, we will only reverse for abuse of discretion if we determine there is a reasonable possibility the pleading can be cured by amendment. Otherwise, the trial court’s decision will be affirmed. (Zelig v. County of Los Angeles, supra, 27 Cal.4th at p. 1126.)

Standing to Bring Derivative Action

“Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute.” (Code Civ. Proc., § 367.) “Generally, ‘the person possessing the right sued upon by reason of the substantive law is the real party in interest.’ [Citations.]” (Del Mar Beach Club Owners Assn. v. Imperial Contracting Co. (1981) 123 Cal.App.3d 898, 906.)

Incorporated homeowners’ associations are considered nonprofit mutual benefit corporations. (Corp. Code, §§ 7110-8910; Gantman v. United Pacific Ins. Co. (1991) 232 Cal.App.3d 1560, 1566, fn. 4.) A nonprofit mutual benefit corporation admits persons to membership rather than as stockholders. (Corp. Code, § 7310.) A nonprofit corporation, like a business corporation, has all the powers of a natural person in carrying out its activities. (Corp. Code, § 7140.)

Powell sued in the Association’s name in her capacity as a member of the Association. A member of a nonprofit corporation is prohibited from instituting or maintaining an action in the right of the corporation unless the action is a derivative suit. (Corp. Code, § 7710; see also, § 7141, subd. (a)(3) [a “member” suing in a “representative” capacity may bring “suit against the officers or directors of the corporation for violations of their authority”].) In a derivative suit the member seeks to recover for the benefit of the corporation and its whole body of members when injury is caused to the corporation that may not otherwise be redressed because of a failure of the corporation to act. (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.) The member is a nominal plaintiff in a derivative action. The corporation is joined as a nominal defendant, but the corporation “‘is the real party in interest to which any recovery usually belongs.’ [Citation.]” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312.)

Corporations Code section 7710, subdivision (b) specifies the requirements a member must satisfy before bringing a derivative action on behalf of a nonprofit mutual benefit corporation. This subdivision provides as follows:

“(b) No action may be instituted or maintained in the right of any corporation by any member of such corporation unless both of the following conditions exist:

“(1) The plaintiff alleges in the complaint that plaintiff was a member at the time of the transaction or any part thereof of which plaintiff complains, . . .; and

“(2) The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.”

The requirements for a derivative action also make provisions that a plaintiff post a bond, and for a motion procedure whereby the corporation may move to impose the bond. (Corp. Code, § 7710, subds. (c) – (f).)

The record amply demonstrates Powell wrote numerous complaint letters to the Association and its president. These letters, attached as exhibits to the complaint, primarily concerned Powell’s personal grievances against the Association and its president. Powell’s letters concerning her personal issues were inadequate to serve as a demand, or a specific request, for redress for the Association’s benefit as is required before filing suit on behalf of an association. (Corp. Code, § 7710, subd. (b)(2).) In addition, Powell’s second amended complaint did not allege that before filing suit she informed the Association’s board of all her proposed causes of action against it. Nor did Powell’s complaint allege she had provided the board with a copy of the complaint she proposed to file as is required by Corporations Code section 7710, subdivision (b)(2).

In these circumstances, the court correctly found Powell had not satisfied the statutory requirements for bringing a derivative suit on behalf of the Association.

Standing Under the Common Interest Development Act Statutes

Powell asserts that because other statutes authorized her to file this lawsuit in the Association’s name as a member representative it was unnecessary for her to allege compliance with Corporations Code section 7710, subdivision (b) as a prerequisite for filing this derivative action.

Powell points to Code of Civil Procedure section 369, subdivision (a)(4) which states a person is authorized to sue without joining the beneficiary when “expressly authorized by statute.” She claims that notwithstanding the requirements in the Corporations Code for bringing a derivative action against a nonprofit mutual benefit corporation, statutes in the Davis-Stirling Common Interest Development Act (Civ. Code, § 1350 et seq.) authorized her to bring an action in the Association’s name as a “member representative.”

Civil Code section 1368.3, Powell claims, is one such statute. This section gives homeowners’ associations standing to sue as real parties in interest in all types of actions for damage to common areas. Civil Code section 1368.3 provides: “An Association established to manage a common interest development has standing to institute, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings in its own name as the real party in interest and without joining with it the individual owners of the common interest development, in matters pertaining to the following:

“(a) Enforcement of the governing documents.

“(b) Damage to the common area.

“(c) Damage to a separate interest that the association is obligated to maintain or repair.

“(d) Damage to a separate interest that arises out of, or is integrally related to, damage to the common area or a separate interest that the association is obligated to maintain or repair.”

As Powell correctly notes, Civil Code section 1368.3 expressly grants a homeowners’ association standing to sue or be sued regarding damage to common areas. (See also, Windham at Carmel Mountain Ranch Assoc. v. Superior Court (2003) 109 Cal.App.4th 1162, 1172 [predecessor statute to Civil Code section 1368.3 statutorily provided the association with the requisite privity to state a cause of action against the builder and others for breach of implied warranty with respect to the common areas of a condominium owned by a member of the association].) Civil Code section 1368.3, however, says nothing about authorizing a member representative to file suit in a homeowners’ association’s name without the express consent of the association’s board—as in this case. Accordingly, Civil Code section 1368.3 does not assist Powell.

Powell claims Civil Code section 1354 is another statute which authorized her to bring suit in the Association’s name as a member representative. Civil Code section 1354 concerns enforcement of covenants and restrictions in a homeowners’ association’s governing documents. Civil Code section 1354, subdivision (a) states: “The covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall inure to the benefit of and bind all owners of separate interests in the development. Unless the declaration states otherwise, these servitudes may be enforced by any owner of a separate interest or by the association, or by both.” (Italics added.)

Because Civil Code section 1354 authorizes both an owner and an association to bring suit, Powell asserts she chose to sue in the Association’s name rather than in her own name. However, Civil Code section 1354 does not, as Powell suggests, provide her standing to maintain this suit in the Association’s name and on its behalf. It clearly permits the Association to file a suit in its own name to enforce the covenants and restrictions in its governing documents when its board elects to do so. (See, e.g., Duffey v. Superior Court (1992) 3 Cal.App.4th 425, 430 [homeowners’ association filed an action for declaratory relief to determine whether proposed construction would violate the association’s CC&Rs].) However, the Association through its board did not elect to file the present action.

Civil Code section 1354 would have also authorized Powell as a member/owner to file an enforcement action in her own name. (See, e.g., Lamden v. La Jolla Shores Clubdominium Homeowners Assoc. (1999) 21 Cal.4th 249, 254 [homeowner filed suit against the homeowners’ association asserting numerous causes of action based on the association’s refusal to fumigate for termites]; Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 367 [homeowner sued to prevent homeowners’ association from enforcing a restriction against keeping pets in the condominium development]; Posey v. Leavitt (1991) 229 Cal.App.3d 1236, 1247 [condominium owner, as well as homeowners’ association, had cause of action against another owner for encroachment on common area in violation of restrictions]; but see, Farber v. Bay View Terrace Homeowners Assoc. (2006) 141 Cal.App.4th 1007, 1011 [seller of condominium did not have standing to enforce obligations owed to buyer by association under the CC&Rs; seller could not enforce the CC&Rs because she no longer owned the unit].)

Despite the trial court’s repeated advice to sue in her own name, Powell elected not to do so. Powell consistently maintained, albeit erroneously, she was statutorily authorized to bring the action in the Association’s name, against itself and its board members and officers, and without the Association’s authorization or consent. In this Powell was wrong. None of the cited statutes can be construed in the manner Powell suggests to permit a member representative to file an action against an association, in the name of the association, in order to avoid the statutory requirements for properly pursuing a derivative action in compliance with Corporations Code section 7710, subdivision (b).

On appeal, Powell continues to assert the notification/demand requirements of Corporation Code section 7710, subdivision (b) are inapplicable when an association wishes to enforce its governing documents and covenants and restrictions under the Davis-Stirling Common Interest Development Act provisions (Civ. Code, § 1350 et seq.). This is true, but irrelevant where, as here, the Association did not bring or authorize the present suit. Powell continues to insist she need not take this distinction into account. Again Powell is mistaken. We conclude the trial court correctly found these provisions in the Davis-Stirling Common Interest Development Act did not authorize Powell to bring the present action in the Association’s name.

Powell’s proposed third amended complaint suffers from the identical fatal defects found in the second amended complaint.

Leave to Amend

Powell requested leave to amend to add the Association’s insurer as a defendant. Powell wanted to assert a claim for the insurer’s alleged bad faith (Ins. Code, § 790.03) in failing to pay the Association the limits of liability under its directors’ and officers’ policy of $4 million. The trial court denied her request, noting even its prior grants of leave to amend did not include leave to add entirely new parties, but only leave to amend the causes of action in the existing complaint. (Citing People ex rel. Department of Public Works v. Clausen (1967) 248 Cal.App.2d 770, 785-786 [because leave to amend was granted after sustaining the State’s demurrer, such leave to amend did not entitle the cross-plaintiff to add new parties as cross-defendants].)

Leave to amend for this purpose would have been futile. As noted, Powell did not, and could not, allege compliance with the demand and notification requirements of Corporations Code section 7710, subdivision (b) in order to properly assert a derivative claim against the insurer on the Association’s behalf. Nor could Powell sue the Association’s insurer in her own name. An individual member of a homeowners’ association lacks standing to maintain an action against an association’s insurer on policies purchased by and issued to the homeowners’ association. (Gantman v. United Pacific Ins. Co., supra, 232 Cal.App.3d at pp. 1566-1569.)

“It is well settled that only parties with a real interest in a dispute have standing to seek its adjudication. . . . ‘Where the complaint states a cause of action in someone, but not in the plaintiff, a general demurrer for failure to state a cause of action will be sustained.’ [Citation.]” (Killian v. Millard, supra, 228 Cal.App.3d at p. 1605.) Because Powell has consistently maintained she does not need to cure the complaint’s defects in order to pursue a derivative action in the Association’s name, we find the trial court did not abuse its discretion in sustaining the defendants’ demurrer without leave to amend and in dismissing the action.

Because the finding Powell’s derivative action is fatally flawed is dispositive, we need not analyze the substantive merits of each of the causes of action alleged in the second amended complaint.

DISPOSITION

The judgment is affirmed. Respondents are awarded their costs of appeal.

We concur: MALLANO, P. J., ROTHSCHILD, J.


Summaries of

San Simeon Condominium Assn. v. 2006, 2007 Bd. of Directors

California Court of Appeals, Second District, First Division
Jul 29, 2008
No. B204041 (Cal. Ct. App. Jul. 29, 2008)
Case details for

San Simeon Condominium Assn. v. 2006, 2007 Bd. of Directors

Case Details

Full title:SAN SIMEON CONDOMINIUM ASSOCIATION, Plaintiff and Appellant, v. 2006, 2007…

Court:California Court of Appeals, Second District, First Division

Date published: Jul 29, 2008

Citations

No. B204041 (Cal. Ct. App. Jul. 29, 2008)