Prevailing Homeowners’ Associations May Not Necessarily Recover Their Attorneys’ Fees and Costs

Introduction

As we have previously discussed, California homeowners’ associations (HOAs),[1] must follow the Davis-Stirling Common Interest Development Act (the “Act”).[2]  The Act generally provides that “[i]n an action to enforce the governing documents, the prevailing party shall be awarded attorney’s fees and costs.”[3]  Therefore, HOAs often recover their attorneys’ fees and costs when the HOA prevails in the litigation.  This is a significant consideration as these awards often exceed whatever amount, if any, in dispute and attorneys’ fees can easily surpass $100,000 in a heavily-litigated case.

The recent case of Retzloff v. Moulton Parkway Residents’ Assn., No. One (2017) 14 Cal.App.5th 742, 746, clarified that despite the prevailing party fee-shifting provision of the Act there are certain other provisions under the Act – involving non-reciprocal statutory attorneys’ fee- and cost-shifting statutes — where a prevailing association may not necessarily recover its attorneys’ fees or even its costs unless the member’s action was frivolous.  Associations should be mindful of such non-reciprocal provisions prior to and during potential litigation over those areas of the Act as it may affect the Association’s legal strategy.

Case Background

Plaintiffs Retzloff, Franklin and Stewart (collectively, “Retzloff”), who were all former Board members of defendant Moulton Parkway Residents’ Association, No. One (the “Association”), accused the Association of violating the following areas of the Act: (i) the Common Interest Development Open Meeting Act (Civil Code section 4900 et seq.); and (ii) provisions allowing members to inspect Association records (Civil Code section 5200 et seq.).[4]  Retzloff first demanded alternate dispute resolution (“ADR”) as a necessary prerequisite to filing a lawsuit under the Act, which requires that plaintiffs attach a certificate of ADR compliance to the complaint.[5]  The Association accepted Retzloff’s ADR demand but the ADR never actually took place.[6]

Despite not participating in ADR, Retzloff then filed a lawsuit, but failed to attach an ADR certificate. The Association demurred to the lawsuit on that basis, and Retzloff dismissed without prejudice and filed a new action a couple months later.[7]  The new action was “practically identical” to the first action, but Retzloff attached an ADR certificate to the new action.[8]

The Association again demurred on the grounds the ADR certificate was insufficient, as ADR did not actually occur.[9]  Retzloff argued that the requirement to participate in ADR had been satisfied because the Association failed to share records with them, which precluded a fair opportunity to participate in ADR.[10]

The trial court agreed with the Association, sustained the demurrer without leave to amend, and found the Association to be the prevailing party for purposes of attorneys’ fees and cost recovery.[11]  The trial court awarded the Association $13,750 in attorneys’ fees and $1,688.60 in costs.  Retzloff then paid the judgment and appealed the award of attorneys’ fees and costs, which became the sole substantive issue on appeal.[12]

Legal Analysis

 

Right to Recover Attorneys’ Fees Must Arise from Agreement or Statute

As a foundation to its review, the court reiterated the well-known “American Rule,” which “provides that each party to a lawsuit must ordinarily pay his or her own attorney fees.”[13]  The general exceptions to the American Rule are either fee-shifting by statute or an agreement between the parties.  Here, there was no agreement between the parties authorizing attorneys’ fee-shifting on this subject matter.  There are several attorneys’ fees and cost shifting provisions under the Act.  Therefore, the court focused on the Act and found that there were only two bases for a potential award of attorneys’ fees and costs under the claims brought by Retzloff: (i) Civil Code section 4955 for the claimed violations of the Open Meeting Act; or (ii) Civil Code section 5235 for the claimed violations concerning the failure to provide Association records.

Associations May Not Recover Attorneys’ Fees under the Open Meeting Act

As it pertains to Civil Code section 4955, the court looked to relatively recent precedent.  In That v. Alders Maintenance Assn. (2012) 206 Cal.App.4th 1419, 1425, the court analyzed the plain text of section 4955(b) to find that a prevailing association is only entitled to recover “costs” if the court finds “the action to be frivolous, unreasonable, or without foundation.”[14]  The That court stated that “[i]f the Legislature had intended the last sentence of subdivision (b) to include attorney fees, as well as costs, it could and would have said so.”  Therefore, the court relied on That to quickly determine the Association was not entitled to a recovery of attorneys’ fees based on section 4955(b).[15]

Under the Act, “Costs” Does Not Include Attorneys’ Fees

The court then turned its attention to Civil Code section 5235.  Section 5235(c) is similar in some respects to section 4955, but is phrased differently: “A prevailing association may recovery any costs if the court finds the action to be frivolous, unreasonable or without foundation.”

Per the basic tools of statutory construction, the court looked to the “plain language” of the statute to determine that the “plain reading of ‘any costs’ as used in section 5235(c) does not support the inclusion of attorney fees as costs.”[16]  In so holding, the court rejected the Association’s clever argument that section 5235(a), which authorized a prevailing member to recover the member’s “reasonable costs and expenses, including reasonable attorney’s fees”, had defined “costs” thereafter under all of section 5235 to include attorneys’ fees. In section 5235(a), the Legislature explicitly authorized the recovery of attorneys’ fees whereas in section 5235(c) the Legislature limited the recovery to “any costs.”  As summarized by the court, “[w]e must interpret x to mean x, not x plus y . . . [c]osts by its plain meaning does not mean costs plus attorney fees.”[17]

The court went on to review the other fee-shifting provisions of the Act generally in support of its determination that the word “costs” as used in the Act does not include “attorneys’ fees.”  Under the court’s analysis, the Legislature used “costs” in certain provisions and included attorneys’ fees in other provisions for a reason. Consistent with other precedent interpreting the Act pertaining to liening and foreclosures discussed in prior articles, the court again found that the Act means what it says.  Therefore, “the Legislature could have awarded attorney fees to a prevailing association in section 5235(c), but chose not to.”[18]  Accordingly, the court reversed the attorney fee award to the Association of $13,750.

Failure to Comply with the ADR Requirements of the Act May Be “Frivolous”

Finally, the court found in favor of the Association as to the award of costs, upholding the trial court’s determination that Retzloff’s claims were frivolous.  The court found the term “frivolous” under section 5235(c) to mean that “any reasonable attorney would agree it is completely without merit in the sense that it lacks legal grounds, lacks an evidentiary showing, or involves unreasonable delay.”[19]  Here, the Act clearly required Retzloff to participate in ADR prior to filing the complaint. Yet, Retzloff filed two nearly identical complaints without following the Act’s ADR requirement.  As the court stated, “[a]ny reasonable attorney would agree that refiling the same action without adequately remedying the first action’s deficiencies is completely without merit and lacks legal grounds.”[20]  Therefore, the court upheld the award of costs against Retzloff and provided a useful reminder to attorneys litigating homeowners’ association matters to follow the ADR requirement in the Act or more carefully document why ADR could not have occurred.  The Act means what it says when it requires pre-litigation ADR.

Conclusion

This case is yet another reminder that courts will first analyze the Act under its plain meaning.  If the plain meaning is clear, the courts will interpret “x to mean x.”  Read the Act carefully and advise your clients accordingly.

 

 

Tahoe Truckee Business Law/Entity Practice, Homeowners’ Association Practice, Real Estate Practice; Trust, Estate Planning and Elder Law

This article is for informational purposes only and not for the purpose of providing legal advice. This article contains the personal views and opinions of the author only as to California law, and does not necessarily reflect those of the Washoe County Bar Association or the Porter Simon law firm.  The author makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this article and expressly disclaims liability for any errors and omissions in this publication.     

Brian C. Hanley is an attorney practicing in California and Nevada, and is a principal in the Porter Simon law firm located in Truckee, with offices in Reno and Tahoe City.  He practices primarily in the areas of real estate, business, and homeowners’ associations.  Brian may be reached at hanley@portersimon.com or at the firm’s web site www.portersimon.com.

© 2018

 

[1] The term “homeowners’ association” is not found in the Act.  Homeowners’ associations are known as “associations” of “common interest developments.” Not quite as catchy.  Nevertheless, this article will use homeowners’ association as it is a more commonly-used term.

[2] Effective as of January 1, 2014, the Act has been relocated from California Civil Code sections 1350 et seq. to Civil Code sections 4000 et seq.

[3] Civil Code § 5975(c).

[4] Retzloff v. Moulton Parkway Residents’ Assn., No. One (2017) 14 Cal.App.5th 742, 747.

[5] Id. at 746.

[6] Id.

[7] Id. at 747.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] On appeal, two procedural issues were also litigated: (1) whether Retzloff had waived the claim that Civil Code section 5235(c) did not authorize an award of attorneys’ fees; and (2) whether Retzloff waived their rights to appeal by paying the judgment.  The court found that Retzloff had not waived either claim because (1) Retzloff was entitled to raise issues of law only (e.g., statutory interpretation) on appeal even if not raised at the trial court level; and (2) Retzloff did not lose the right to appeal because they complied with the judgment as a satisfaction of judgment is viewed as “compulsory” and Retzloff did not otherwise agree to waive the right to appeal by settlement, compromise or agreement with the Association.

[13] Id. at 749.

[14] Id. at 748-749.

[15] Id. at 749.

[16] Id. at 750.

[17] Id.

[18] Id.

[19] Id. at 753.

[20] Id. at 754.