Source: https://www.davis-stirling.com/HOME/Case-Law/Palm-Springs-II-v-Parth
Timestamp: 2019-04-24 22:30:00+00:00

Document:
Epsten Grinnell & Howell, Anne L. Rauch and Joyce J. Kapsal for Cross-complainant and Appellant.
Kulik Gottesman & Siegel, Leonard Siegel, Thomas M. Ware II and Francesca N. Dioguardi for Cross-defendant and Respondent.
The Palm Springs Villas II Homeowners Association, Inc. (Association) appeals from a judgment entered in favor of Erna Parth, in connection with actions she took while simultaneously serving as president of the Association and on its Board of Directors (Board). The court granted Parth’s motion for summary judgment as to the Association’s claim for breach of fiduciary duty on the basis of the business judgment rule and an exculpatory provision contained in the Association’s Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The court had previously sustained Parth’s demurrer to the Association’s claim for breach of governing documents without leave to amend, finding that the Association failed to allege a cognizable breach.
On appeal, the Association argues that the trial court erred in its application of the business judgment rule and that there remain material issues of fact in dispute regarding whether Parth exercised reasonable diligence. We agree that the record discloses triable issues of fact that should not have been resolved on summary judgment. We therefore reverse the judgment in favor of Parth. The Association also contends that it stated a claim for breach of the governing documents and that the court erred in sustaining Parth’s demurrer. We conclude that the document cause of action is, at best, duplicative of the fiduciary breach cause and affirm the ruling sustaining the demurrer as to that cause of action without leave to amend.
The Association is the governing body for Palm Springs Villas II, a condominium development, and is organized as a nonprofit corporation under California law. The Board, comprised of five homeowners or their agents, governs the Association. The Association’s governing documents include the CC&Rs and its Bylaws. Each homeowner is an Association member and is required to comply with the terms set forth in these documents.
During the relevant time, Parth was president of the Association, as well as a Board member.
In 2006, the Board hired AWS Roofing and Waterproofing Consultants (AWS) in connection with roofing repairs, with the intention that AWS would vet the companies submitting bids and perform other tasks related to the repairs. According to Parth, AWS prepared a budget estimate for the repairs, the Board submitted a request to the members for a special assessment to offset these costs, and the members voted against the request. Parth then found and retained a roofing company on her own, without consulting either the Board or AWS.
Parth indicated that she tried to contact the roofing company that had previously worked on the roofs, but it was no longer in business, and that she could not find another roofer due to the Association’s financial condition. She obtained the telephone number for a company called Warren Roofing from a contractor that was working on a unit. The record reflects that the person Parth contacted was Gene Layton. At his deposition, Layton stated that he held a contractor’s license for a company called Bonded Roofing and that he had a relationship with Warren Roofing, which held a roofing license. When asked about that relationship, Layton explained that on a large project, he would be the project manager.
According to a June 2007 Board resolution, the Board hired Bonded Roofing to work on a time and materials basis. Layton said that he never met with the Board in a formal meeting or submitted a bid for the work before he started work on the roof. The Association had no records of a written contract with Bonded Roofing or any other roofer.
In April 2007, the Board voted to hire a construction company to repair the walkways. The Board asked the membership to vote on a special assessment to fund this and other repairs. The membership voted to approve the special assessment.
In July 2007, Parth signed promissory notes for $900,000 and $325,000, secured by the Association’s assets and property. She stated that at the time the special assessment was approved, the Board was investigating the possibility of obtaining a loan to raise the capital needed to immediately commence work on the walkway project. Thomas indicated that, as an Association member, he was never asked to approve the debt and did not learn about it until this litigation commenced. The Association had no records indicating that the members were ever informed about, or voted on, the debt.
In April 2010, the Board approved a bid from a paving company to perform repaving work. According to Parth, the Board elected to finance this repaving project with a bank loan, the Board reviewed the loan at the April 2010 meeting, and “unanimously approved” that Parth and/or ApRoberts would sign the loan documents. Parth further stated that at a special Board meeting in May 2010, attended by her, ApRoberts, and Board member Elvira Kitt-Kellam, the Board “resolved that the Association had the power to borrow and pledge collateral” and authorized her and ApRoberts to execute loan documents. Thomas stated that he never received notice of this meeting. In May 2010, Parth and ApRoberts signed a promissory note for $550,000, secured by the Association’s accounts receivable and assets. Thomas indicated that he was never asked to vote on this debt and, again, there were no Association records indicating that the members were notified about or voted on it.
During the relevant time period, the Association’s management company was Personalized Property Management (PPM). According to Parth, PPM’s owner advised her in or around June or July 2011 that PPM no longer wanted to provide management services for the Association. At a July 9, 2011 Board meeting regarding termination of PPM, the Board tabled any decision to terminate PPM until bids from other companies were obtained and reviewed. Parth proceeded to hire the Lyttleton Company to serve as the Association’s new management company. Thomas stated that he never received written notice of a Board meeting to vote on the hiring of Lyttleton. Parth noticed an executive meeting for July 16, 2011, to discuss termination of PPM and retention of a new company, at which time the Board voted three to two to terminate PPM. Thomas stated that he objected to the vote at the time, based on the Board’s prior decision to table the matter.
Gary Drawert, doing business as Desert Protection Security Services (Desert Protection), had provided security services for Palm Springs Villas II since 2004. The Association executed a written contract with Desert Protection in December 2003 for one year of security services. Thomas stated that after joining the Board, he learned that Desert Protection and other vendors were providing services pursuant to “oral or month-to-month agreements.” In July 2010, the Board authorized Thomas to obtain bids from security companies to provide security services for 2011.
In January 2011, Parth signed a one-year contract with Desert Protection. Her understanding was that “any contract that was not renewed in writing would . . . be automatically renewed until terminated” and that she was “merely updating the contract, as instructed by management.”[fn. 2] She believed that she had the “authority to sign the contract as the Association’s president.” She further explained that, at the time, the Board had not voted to terminate Desert Protection and discussions regarding a new security company had been tabled.
There were no records indicating that Parth submitted the 2011 Desert Protection agreement to the Board for review or that the Board authorized her to execute it. According to Thomas, Parth did not inform the other Board members that she had signed the agreement. Michael likewise indicated that he had not attended any Board meeting at which the agreement was discussed, and he did not recall the Board having voted on it. Kitt-Kellam stated that the Board never authorized the contract.
In February 2011, the Association’s manager sent Parth and others an e-mail recommending that the Board update certain contracts, including the contract with Desert Protection. Thomas presented the security company bids at a March 2011 Board meeting. The Board tabled the discussion at this meeting and at the subsequent April 2011 meeting. At the July 2011 meeting, the Board approved a proposal from Securitas in a three-to-one vote, with Parth abstaining. According to Thomas, Parth did not disclose at any of these meetings that she had signed a one-year contract with Desert Protection in January 2011. Following the July 2011 Board meeting, Desert Protection was sent a 30-day termination letter, based on the Board’s understanding that the company was operating on a month-to-month basis.
In August 2011, Gary Drawert, the principal of Desert Protection, left a voice mail message for Thomas regarding the Desert Protection agreement. Thomas indicated that prior to this voice mail, he was not aware of the agreement. At the September 2011 Board meeting, Parth produced the Desert Protection agreement. The Board did not ratify it.
Drawert sued the Association for breach of contract. The Association cross-complained against Desert Protection and Parth. Following an initial demurrer, the Association filed the operative First Amended Cross-Complaint. The Association settled with Drawert.
With respect to Parth, the Association asserted causes of action for breach of fiduciary duty and breach of governing documents. The cause of action for breach of fiduciary duty alleged that Parth had breached her duties to comply with the governing documents and to avoid causing harm to the Association by, among other things, refusing to submit bids or contracts to the Board, “unilaterally terminating” PPM, and signing the contract with Desert Protection. The breach of governing documents cause of action identified CC&R and Bylaw provisions and identified actions taken by Parth in breach of these provisions, including the termination of PPM and entering into the Desert Protection contract.
Parth demurred to the First Amended Cross-Complaint. With respect to the governing documents claim, she contended that the claim failed to state a cause of action and was uncertain. The court sustained the demurrer without leave to amend as to this cause of action. We discuss this ruling in more detail, post.
The trial court also ruled on the Association’s evidentiary objections; the parties do not indicate whether the court ruled on Parth’s objections. The court entered judgment for Parth and the Association timely appealed.
The Association claims that the trial court erred in granting Parth’s motion for summary judgment.
The Association raises two challenges to the summary judgment ruling: that the trial court erred by applying the business judgment rule to Parth’s ultra vires acts (or conduct otherwise outside Parth’s authority) and that there are triable issues of material fact as to whether Parth exercised reasonable diligence.
The Association has not established that Parth’s conduct was ultra vires. Ultra vires conduct is conduct that is beyond the power of the corporation, not an individual director. (See McDermott v. Bear Film Co. (1963) 219 Cal.App.2d 607, 610-611 [“In its true sense the phrase ultra vires describes action which is beyond the purpose or power of the corporation.”]; Sammis v. Stafford (1996) 48 Cal.App.4th 1935, 1942 [“If, however, the director’s act was within the corporate powers, but was performed without authority or in an unauthorized manner, the act is not ultra vires.”].) The Association does not distinguish these authorities, nor does it identify conduct by Parth that went beyond the power of the Association.
However, the Association does cite cases suggesting that noncompliance with governing documents may fall outside the scope of the business judgment rule, at least in certain circumstances. (See Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374 (Nahrstedt) [finding “courts will uphold decisions made by the governing board of an owners association,” where among other things, they “are consistent with the development’s governing documents”]; Lamden, supra,21 Cal.4th at p. 253 [requiring that association board “exercise discretion within the scope of its authority under relevant statutes, covenants and restrictions” in order to merit judicial deference]; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 979 [accord]; Scheenstra v. California Dairies, Inc. (2013) 213 Cal.App.4th 370, 388 [finding a “board’s decision is not scrutinized under the business judgment rule . . . until after the court determines that the action . . . falls with the discretionary range of action authorized by the contract”].) See also Ekstrom v. Marquesa at Monarch Beach Homeowners Assn. (2008) 168 Cal.App.4th 1111, 1123 (“Even if the Board was acting in good faith . . ., its policy . . . was not in accord with the CC&Rs. . . . The Board’s interpretation of the CC&Rs was inconsistent with the plain meaning of the document and thus not entitled to judicial deference.”).
Parth contends that the business judgment rule protects a director who violates governing documents, as long as the director believes that the actions are in the best interests of the corporation. She relies on Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125 (Biren). Biren, which involved a dispute between a company and a former director, held that the “business judgment rule may protect a director who acts in a mistaken but good faith belief on behalf of the corporation without obtaining the requisite shareholder approval.” The Biren court determined that the director in question was protected by the rule, even though she violated the shareholder agreement. (Id. at pp. 131-132.) However, the court did not suggest that such conduct would always be protected. Rather, the court concluded that the violation “did not by itself make the business judgment rule inapplicable,” explaining that the company failed to prove that the director had “intentionally usurped her authority” or that “her actions were anything more than an honest mistake.” (Id. at p. 137.) The court also noted the trial court’s “finding that [the director] `reasonably relied’ on information she believed to be correct,” observing that this was “tantamount to a finding she acted in good faith.” (Id. at p. 136.) In other words, Biren held that the director’s violation of the governing documents did not render the business judgment rule inapplicable under the circumstances; namely, where the remainder of the business judgment rule requirements were satisfied.
Here, the trial court agreed that there was a triable issue of material fact as to whether Parth breached the governing documents, but concluded that even if she had, this was insufficient to overcome the protection of the business judgment rule. However, the case law is clear that conduct contrary to governing documents may fall outside the business judgment rule. (See, e.g., Nahrstedt, supra, 8 Cal.4th at p. 374.) Even if Biren establishes an exception to this principle where the director has satisfied the remaining elements of the business judgment rule, in this case, triable issues of material fact exist as to other elements of the rule and render Biren inapplicable, at least at this stage. The trial court erred in assuming that the business judgment rule would apply to Parth’s actions that violated the governing documents.
Although the trial court properly recognized that a director must act on an informed basis, be reasonably diligent, and exercise care in order to rely on the business judgment rule, the court erred in concluding that the Association failed to demonstrate triable issues of fact with respect to these matters. (See Gaillard, supra, 208 Cal.App.3d at pp. 1271-1272, 1274 [reversing summary judgment due to material issues of fact as to whether further inquiry was warranted].) We conclude that material issues of fact exist as to whether Parth exercised reasonable diligence in connection with the actions at issue.
Although the trial court declined to address much of the Association’s evidence, it did discuss the Desert Protection situation. The court stated that the Association disputed the basis for Parth’s belief in her authority to sign the Desert Protection contract by citing the Bylaws, and concluded that this evidence did not controvert Parth’s professed belief. While the Bylaws may not undermine Parth’s belief, together with the Association’s other evidence, they do demonstrate the existence of a triable issue of material fact as to whether Parth’s proceeding on such belief—without keeping the Board informed—showed reasonable diligence under the circumstances.
In sum, the Association produced evidence establishing the existence of triable issues of material fact as to whether Parth acted on an informed basis and with reasonable diligence, precluding summary judgment based on the business judgment rule. The trial court’s erroneous conclusion that “there [was] no evidence that Parth did not use reasonable diligence” reflects a misapplication of the business judgment rule, summary judgment standards, or both. To the extent that the court viewed the Association’s evidence regarding Parth’s diligence as irrelevant, in light of her “belief in [her] authority to act and the need to act,” the court failed to apply the reasonable diligence requirement in any meaningful way. Permitting directors to remain ignorant and to rely on their uninformed beliefs to obtain summary judgment would gut the reasonable diligence element of the rule and, quite possibly, incentivize directors to remain ignorant. To the extent that the trial court did consider the Association’s evidence, but found it insufficient to establish a lack of diligence, the court improperly stepped into the role of fact finder and decided the merits of the issue.
Turning to Parth’s substantive arguments, we first address her contention that she displayed no bad faith. She relies on cases characterizing bad faith as intentional misconduct, encompassing fraud, conflicts of interest, and intent to serve an outside purpose. (See, e.g., Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal.App.4th 365, 379.) However, the Association’s appeal focuses on Parth’s failure to exercise reasonable diligence, so establishing an absence of evidence of intentional misconduct unrelated to diligence does not undermine the Association’s arguments.
The Association contends that the trial court erroneously granted Parth’s demurrer to its cause of action for breach of governing documents, without leave to amend.
Regardless, as Parth argues, the cause of action for breach of governing documents appears to be duplicative of the cause of action for breach of fiduciary duty. This court has recognized this as a basis for sustaining a demurrer. (See Rodrigues v. Campbell Industries (1978) 87 Cal.App.3d 494, 501 [finding demurrer was properly sustained without leave to amend as to cause of action that contained allegations of other causes and “thus add[ed] nothing to the complaint by way of fact or theory of recovery”]; see also Award Metals, Inc. v. Superior Court (1991) 228 Cal.App.3d 1128, 1135 [Second Appellate District, Division Four; demurrer should have been sustained as to duplicative causes of action].)[fn. 12] The Association does not address Parth’s argument or explain how its document claim differs from the fiduciary breach claim. We conclude that the trial court properly sustained the demurrer.
The order granting summary judgment and judgment are reversed. The ruling sustaining the demurrer to the breach of governing documents cause of action without leave to amend is affirmed. The parties shall bear their own costs on appeal.
HUFFMAN, Acting P. J. and PRAGER, J.,[fn. *] concurs.
[FN. 5] All further statutory references are to the Corporations Code unless otherwise indicated.
[FN. 7] There also was no evidence of a written warranty for the roofing work. Layton testified at deposition that he provided a warranty, but did not indicate that it was written, and Parth contends only that she obtained a verbal warranty.
[FN. 8] The Association contends that both Warren Roofing and Bonded Roofing were unlicensed at the time the roofing work was done, while Parth maintains that Warren Roofing was licensed. We need not address this dispute. Although the existence of facts that the exercise of proper diligence might have disclosed (such as license status) may be relevant to whether Parth exhibited reasonable diligence (see Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1046), we conclude that her admission that she “did not investigate anything,” in the context of a major repair project, is sufficient to raise a triable issue.
[FN. 9] For example, Parth indicated both that she believed nonwritten contracts would be automatically renewed and that she was “merely updating” the contract, without explaining why a new or updated contract would be necessary if the existing contract would automatically be renewed.
[FN. 10] The Association also appears to challenge several other actions on the part of Parth, but fails to support its challenge with argument and/or specific authority. These actions include Parth’s execution of the Board member Code of Conduct, certain purported violations of the Common Interest Open Meeting Act and Davis-Stirling Common Interest Development Act, and various facts pertaining to bad faith. We deem these matters forfeited. (People v. Stanley (1995) 10 Cal.4th 764, 793 (Stanley) [it is not the reviewing court’s role to “construct a theory” for appellant: “[E]very brief should contain a legal argument with citation of authorities on the points made. If none is furnished on a particular point, the court may treat it as waived. . . .”].) In addition, because we conclude that the Association has established the existence of triable issues of material fact as to both the business judgment rule and the exculpatory provision of the CC&Rs, see discussion post, we need not reach its arguments under section 5047.5 and Civil Code section 5800 or its argument that Parth is estopped from claiming ignorance of the governing documents.
[FN. 11] We reject Parth’s claim that the Association waived the exculpatory clause issue. Although the Association did not address the issue until its reply brief, it takes the position on reply that the exculpatory clause is “a recitation of the business judgment rule.” Parth, meanwhile, relied on the same undisputed facts to support both issues. Under the circumstances, we see no reason to preclude the Association from relying on its business judgment rule arguments and evidence for the exculpatory clause issue.
[FN. 12] But see Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 890(Sixth Appellate District) (finding that duplication is not grounds for demurrer and that a motion to strike is the proper way to address duplicative material).
[FN. *] Judge of the San Diego Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

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