“Shall” Means Shall: Court Awards HOA Substantial Attorneys’ Fees Despite HOA’s Limited Success in Collecting Fines

Overview: If your homeowners’ association attempted to impose over $54,000 in fines, fees and costs on you based on 88 separate fines and you succeeded in reducing the claim to under $7,000 and knocking out more than 90% of the claimed fines, you might think that you prevailed in the litigation and should recover your attorneys’ fees and costs. If you were the association member in this case, you would have been wrong to the tune of a six figure attorneys’ fees award you would have owed to the homeowners’ association despite your litigation successes. A closer review of the case reveals the importance of choosing your battles wisely for fear of losing the war.

 

My last article for The Blog covered two relatively-recent California cases — Diamond v. Superior Court (2013) 217 Cal.App.4th 1172 and Huntington Continental Townhouse Ass’n, Inc. v. Miner (2014) 230 Cal.App.4th 590 – both involving the Davis-Stirling Common Interest Development Act (the “Act”)[1] and the courts’ mandate that HOAs strictly comply with all of the Act’s requirements for recording and enforcing liens against HOA members.[2]  The take-home point from these cases was that the Act’s use of the word “shall” in delineating lien and foreclosure procedures meant HOAs must comply with each and every statutory lien and foreclosure requirement even if seemingly inconsequential or without any demonstrated prejudice (e.g., requirements to record the Board vote to foreclose a lien in the Board minutes and to serve notice of the foreclosure vote on the member).

While Diamond and Miner clarified that HOAs must comply with each and every lien and foreclosure requirement, the recent case of Almanor Lakeside Villas Owners Association v. Carson (April 19, 2016) 2016 WL 1586556 (“Almanor Lakeside Villas”) illustrates that this judicial trend towards strict and literal reading of the Act – “shall means shall” – cuts both ways and can actually benefit HOAs in certain circumstances, particularly to allow for the recovery of attorneys’ fees where the HOA is found to be the prevailing party.

As explained in greater detail below, the Court of Appeal in Almanor Lakeside Villas upheld the trial court’s award of over $100,000 in attorneys’ fees to the HOA despite the fact the HOA prevailed at trial on only 8 of its 88 fine claims, recovering just $6,620 of the $54,000 in fines, fees and other amounts sought; likewise, the court validated the owners’ challenge to 80 of the 88 claimed fines.  Yet, somewhat surprising and seemingly unfair on its face, the owners ended up owing over $100,000 in attorneys’ fees to the HOA despite the HOA prevailing on a small percentage of its claims.

In upholding the trial court’s award of substantial attorney’s fees to the HOA, the Court of Appeal reasoned that the Act mandates an award of attorneys’ fees because – you guessed it – the Act states that “[i]n any action to enforce the governing documents, the prevailing party shall be awarded reasonable attorney’s fees and costs.” (emphasis added)  Because the trial court found the HOA to be the prevailing party, the Act mandated an award of attorneys’ fees to the HOA even if the HOA lost the majority of fines sought.  The Court of Appeal held that the owners’ arguments that the attorneys’ fees should be reduced because of limited success can only be addressed to the amount of attorneys’ fees, not the award of fees itself.  And, in this particular case, the Court of Appeal found that the trial court did not abuse its discretion in awarding the HOA all of its fees and costs.  The case is an object lesson to choose your litigation battles wisely.

Factual Background

Before drawing conclusions from Almanor Lakeside Villas, it is important to review the facts closely.  Doing so provides some limits on what superficially appears to be a license for HOAs to be ultra-aggressive in pursuit of fines if the HOA can recover all of its attorneys’ fees even if it prevails on a small subset of fines sought.

The case arose in the mixed development known as Almanor Lakeside Villas Owners Association (the “Almanor HOA”), which included primarily residential properties, but also had a few commercially-zoned properties, including properties owned by James and Kimberly Carson (the “Carsons”).[3]  The Carsons owned the Kokanee Lodge and Carson Chalets, which had historically operated as a commercial hunting, fishing and vacation lodge.[4]  The Covenants, Conditions and Restrictions (“CC&Rs”) for the development were recorded against all properties, including the Carsons’, and gave the Almanor HOA certain enforcement powers against the development.[5]  The CC&Rs included specific provisions prohibiting the use of lots for “transient or hotel purposes” or renting for “any period of less than 30 days.”[6]  The CC&Rs also required the owners to report all tenants’ names and addresses to the Almanor HOA Board.[7]

In 2009, the Almanor HOA Board changed composition and began to develop rules to enforce the CC&Rs, including against the Carsons’ commercial uses.[8]  While the rules exempted the commercial lots from the 30-day rental restriction, they still required the commercial properties to provide the tenants’ names and addresses to the Almanor HOA, which was undoubtedly an inconvenience and seemingly unnecessary (whether it was worth litigation is another question).[9]  The rules also regulated other aspects of the properties, including parking, trash storage, use of common areas, and issuing decals for any boats using the Almanor HOA’s boat slips.[10]  The rules also included fines for violations.[11]

The critical fact in the case as it relates to the award of attorneys’ fees is that the Carsons took the litigation position that their lots were entirely exempt from all use restrictions of the CC&Rs, including the rules promulgated thereunder.[12]  When the Carsons failed to comply with the CC&Rs and rules, the Almanor HOA began to fine the Carsons for a wide variety of purported violations.[13]  This eventually led to the Almanor HOA suing the Carsons to collect the fines, and the Carsons counter-suing. In addition to the fines, the critical issue disputed at trial was whether the Almanor HOA had any enforcement authority at all under the CC&Rs or rules against the Carsons’ commercial properties.

Trial Court Proceedings

The parties achieved mixed results at trial.  While the trial court threw out all of the Almanor HOA’s fines except the fines related to the boat slips, imposing fines totaling $6,620 (throwing out 80 of 88 fine, denying $47,400 of the $54,000 in dues, fees, fines and interest sought), the trial court critically found that the Almanor HOA had the right to impose reasonable use restrictions on the Carsons’ lots, provided the rules were consistent with the Carsons’ right to use their lots for commercial lodging purposes.[14]

Both sides then sought attorneys’ fees, each arguing they had achieved their main litigation objective – for the Almanor HOA, the right to regulate the Carsons’ lot; and for the Carsons, to strike down the Almanor HOA’s fines as an unreasonable and unfair burden on their commercial use.[15]

The trial court found the Almanor HOA to be the prevailing party because it achieved its main litigation objective of establishing the right to reasonably regulate the Carsons’ properties in a manner consistent with its commercial zoning.[16]  The trial court found the Almanor HOA to be the prevailing party even though it lost on the vast majority of the individual fines sought.[17]  Because the Almanor HOA was the prevailing party, the trial court awarded the Almanor HOA all of its attorneys’ fees and costs.[18]

Court of Appeal Ruling

While the Court of Appeal acknowledged that the Carsons prevailed on the majority of the battles over fines, the court also stressed that the Carsons took the position in the litigation that the CC&Rs did not apply to their lots at all and the Almanor HOA had no ability to regulate their lot.[19]  The Carsons’ aggressive posture was defeated by the Almanor HOA and was found to be the central issue in the case, and achieved the Almanor HOA’s main litigation objective.  The Court of Appeal found that the trial court did not abuse its discretion in finding that the Almanor HOA was the prevailing party because it won on this central and important issue – whether the Almanor HOA could regulate the Carsons’ property at all.[20]

Once the trial court found that the Almanor HOA was the prevailing party, the Court of Appeal rejected the Carsons’ equitable and public policy arguments against the substantial award of attorneys’ fees.[21]  Even though the Carsons struck down the vast majority of the fines, the Court of Appeal noted that the Act “mandates the award of attorney’s fees to the prevailing party” and “the trial court had no discretion to deny attorney’s fees” having found that the Almanor HOA prevailed in the litigation.[22] (emphasis added)  The Court of Appeal held that the Carsons’ arguments about the proportionality of the attorneys’ fees to the damages award ($6,620) was committed to the trial court’s discretion, and the trial court did not abuse its discretion by awarding all of the attorneys’ fees even where the fees awarded were disproportionate to the fines upheld.[23]

Take Home Points

In this day and age Litigation is an expensive proposition.  Reported decisions routinely discuss attorney’s fees that exceed six figures in litigated HOA disputes.  With attorney’s fees likely to be a critical aspect of the litigation that will likely far exceed the amount in dispute, and both sides eager to recover their attorneys’ fees and costs, it’s important to remember to frame the issues before the court in a manner that increases the likelihood that your client will be found to be the prevailing party.  Almanor Lakeside Villas is a reminder to try to frame your client’s litigation objectives in a reasonable and achievable way, wherever possible, so that your client can fail on certain aspects of the claim, but still be found to be the prevailing party by obtaining the main litigation objective.

Almanor Lakeside Villas is also a cautionary tale of the potential downside of taking too aggressive a litigation posture.  By arguing for an aggressive position – that the recorded CC&Rs did not apply at all to their lot – the Carsons allowed the Almanor HOA to achieve its main litigation objective by simply establishing a limited right to regulate the Carsons’ properties even though the Almanor HOA had unreasonably regulated the Carsons.  While an aggressive litigation posture may help for certain litigation issues, including possibly framing the case for settlement, it can also be harmful when the court is tasked to ask which party prevailed where the litigation results are mixed.

The Court of Appeal opinion does not expressly state which Almanor HOA rules the trial court found to be unreasonable, but the only fines that it allowed to stand were related to the boat slips.  By implication, the trial court must have found the other rules, such as providing the transient lodging renter’s names to the HOA, to be unreasonable.  Had the Carsons acquiesced that the Almanor HOA had the right to regulate their lot, but fought a winnable battle by arguing that the Almanor HOA exceeded its authority in adopting unreasonable rules contrary to their vested right to commercial use (a position the court largely agreed with), the Carsons may have been found to have been the prevailing party with the attendant mandatory recover of attorneys’ fees and costs.  Though the Carsons won several battles, they ultimately lost the war and a six figure judgment composed primarily of attorneys’ fees as a result.

 

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, estate planning and homeowners’ association law.  Brian may be reached at hanley@portersimon.com or at the firm’s web site www.portersimon.com.

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters. 

 

[1] The Davis-Stirling Common Interest Development Act regulates homeowner’s associations in California.  It is lengthy and cumbersome.  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.

[2] Nevada adopted the Uniform Common Interest Ownership Act of 1982, § 3–116, 7 U.L.A., part II 121–24 (2009) (amended 1994, 2008) (UCIOA in 1991, 1991 Nev. Stat., ch. 245, § 1–128, at 535–79, and codified as NRS Chapter 116. (See NRS 116.001; SFR Investments Pool 1 v. U.S. Bank, 130 Nev. Adv. Op. 75, 334 P.3d 408, 410 (2014), reh’g denied (Oct. 16, 2014).)

[3] Almanor Lakeside Villas Owners Ass’n v. Carson (April 19, 2016) 2016 WL 1586556 at *1-2.

[4] Id. at *1.

[5] Id. at *2.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id. at *2-4.

[15] Id. at 3.

[16] Id. 3.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 8.

[21] Id. at 8.

[22] Id. at 8.

[23] Id. at 9.