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WHOOPS, I FORGOT TO READ THE CC&RS IN MY RUSH TO SUE SOMEONE – DEVELOPING DEFENSES IN ASSOCIATION ACTIONS BASED ON THE BRANCHES NEIGHBORHOOD DECISION

In the rush to get lawsuits filed, many plaintiffs’ attorneys try to push a lawsuit through a homeowner association’s board of directors without regard to the procedural requirements of the requirements in the covenants, conditions, and restrictions (“CC&Rs”). Such attorneys probably thought compliance with the inconvenient formal requirements of the CC&Rs, such as amassing an association wide membership vote to approve pursuing litigation, was more hassle than it was worth. The lack of enforcement of the CC&Rs by trial courts, and the absence of any appellate decisions determining the validity of a lawsuit that proceeded without an association wide membership vote, likely emboldened those attorneys.

Times have changed. As of August 24, 2018, CC&Rs are no longer a document to be disregarded by plaintiffs’ attorneys in the rush to file a lawsuit. The Fourth Appellate District Court, in Branches Neighborhood Corporation v. Calatlantic Group, Inc. (2018) 26 Cal.App.5th 743, upheld an order granting summary judgment in the developer’s favor due to the association’s failure to obtain a majority approval from the association’s members prior to initiating a claim. (Id. at p. 414.) In Branches Neighborhood, the CC&Rs at Section 12.4.2 stated:

“Required Vote to Make Claim. Prior to filing a claim pursuant to the ADR Provisions, the Neighborhood Corporation must obtain the vote or written consent of Owners other than Neighborhood Builder who represent not less than fifty-one percent (51%) of the Neighborhood Corporation’s voting power (excluding the voting power of Neighborhood Builder).”

(Id. at p. 415.)

The association filed a demand for arbitration before obtaining approval from a majority of the members. (Id. at p. 415.) The Branches Neighborhood court upheld an order entered by the arbitrator that granted the developer’s motion for summary judgment since “the plain language of the CC&Rs controls.” (Id. at p. 419.) The Branches Neighborhood, importantly, decided the association’s attempt to obtain membership approval after initiating litigation did not retroactively cure the association’s non-compliance with the CC&Rs. (Id. at p. 415.)

The association’s counsel contended statutes within the Davis-Stirling Act excused the association’s non-compliance with the CC&Rs on the theory that the statutes authorized the association to initiate litigation without membership approval. The Branches Neighborhood court rejected the contention and decided compliance with the CC&Rs voting requirements is mandatory. (Id. at p. 422.)

Public policy reasons also supported entering summary judgment in the developer’s favor since the purpose of requiring majority membership approval is consistent “with the rights of its members to be informed and participate in decisions that could impact the association for years, if not decades, to come.” (Id. at p. 422.) Especially when litigation “will be difficult, expensive, and time consuming.” (Ibid.)

The Branches Neighborhood decision affords protection to association members and ensures that they are able to decide whether to initiate costly litigation that takes years to resolve with few tangible benefits upon completion of the litigation.  However, in response to the Branches Neighborhood decision, last month, legislation was introduced by the Plaintiff’s Bar which would limit the decision’s impact.  The proposal adds section 5986 to the Civil Code, which provides (1) that the determination of whether and when an association may commence a civil action or other proceeding against a builder shall be made by the board; and (2) that any existing limitation in the CC&Rs to the board’s power, including a membership vote as a prerequisite to filing a lawsuit, is null and void.  We will keep you advised regarding this important development.

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