Third District Gives Mixed Blessing to Fee Victor.
What happens when a fee award is not sustainable on one ground but correct on another? Answer: a remand, with directions to recalculate the award under the proper fee entitlement statute. The next case—Klamath River Development Co. v. Preston, Case Nos. C054002 & C055369 (3d Dist. Apr. 9, 2009) (unpublished)—illustrates this end result in a recently issue unpublished decision out of the Third District.
In brief, some plaintiff homeowners and former HOA Board members sued HOA to enjoin assessment increases for road repairs when the HOA was badly splintered in composition between homeowners living on the project (wanting the road repairs) and absentee homeowners (not in favor of the repairs and increased assessments). HOA cross-complained, alleging that plaintiffs breached their fiduciary duties as Board members by having kept previous assessment levels artificially low. A jury found that the Board had improperly raised assessments and directed the HOA to reimburse plaintiffs. HOA won a small judgment against one of the plaintiffs and the other plaintiff defensed the fiduciary duty claim in the cross-complaint. The trial court then awarded plaintiffs, as the prevailing parties, costs of $14,982.01 and attorney’s fees of $186,185 under Civil Code section 1354(c) and Corporations Code section 317(d). HOA appealed both the merits and fee award judgments, with the appeals being consolidated for consideration. (BLOG NOTE—It is common for appellate courts to consolidate a merits judgment and fee award for consideration at the same time, because it promotes judicial efficiency in resolving the overall controversy between the parties.)
HOA lost the merits appeal, and the Third District reversed the fee award under Civil Code section 1354(c) but found the Corporations Code section 317(d) predicate to properly anchor the award, remanding so that fees could be recalculated solely under section 317(d).
Civil Code section 1354(c) was found to be an inapt anchor because it only allowed for fee recovery where there was a violation of “governing documents” (usually, the CC&Rs). Here, however, the jury based its verdict on a statutory violation of Civil Code provisions governing HOA assessments—an adjudication not based on breach of the governing documents. This meant it was erroneous to base an award on section 1354. (BLOG OBSERVATION—We have seen many CC&Rs that repeat or summarize the statutory assessment principles, such that section 1354 might indeed be available as a fee anchor depending on the wording of the governing documents.)
Attention then turned to whether the award was justifiable under Corporations Code section 317(d). It was.
Section 317(d) provides for indemnification of a corporate agent who has been successful in a merits-based defense in a proceeding brought against the individual in his agent capacity. Indemnification extends to all “expenses actually and reasonably incurred” by the agent in a failed action against the agent for fraud, negligence, or breach of fiduciary duty. Because one of the individual plaintiffs was a former agent of the HOA and had agreed to reimburse the other plaintiff for any expenses it advanced in the litigation, section 317(d) did apply given that the individual defendant defensed the HOA’s fiduciary duty cross-claim.
HOA argued that the dispute between the fee-paying plaintiff and its former attorneys (Greenberg Traurig) meant the trial court erred in awarding the fees it did. Not so, said the appellate panel. Not only was this only “one factor to be considered by the court in awarding fees,” but the record showed that the lower court had reduced the requested fees of $239,853 by 20%–awarding $186,185 instead, a fact that showed no abuse of discretion in calculating the amount of the fee award.
The appellate court did reverse the fee award and remanded for a recalculation through elimination of any amounts awarded under section 1354. This most likely means that the plaintiffs will still obtain a sizable award of fees in the end, with the Court of Appeal also awarding them costs for winning on appeal.
BLOG UNDERVIEW—The decision also has a nice discussion on how trial litigators can gain admission of Department of Real Estate (DRE) reports into evidence as public records under Evidence Code section 1280. The appellate court found the trial court erred in not admitting the records as trustworthy, but found the exclusion of the DRE reports to be harmless in nature.