Raven's Cove Townhomes, Inc. v. Knuppe Development Co.

Majority - Taylor, P. J.

1. Yes, a homeowners' association has standing to sue a developer for construction defects in both common areas and the exteriors of individual units. The Association has standing to sue for damages to the common areas because it holds fee simple title to them, as provided by Code of Civil Procedure section 374. For defects in the exteriors of individual units, the Association has standing to sue in a representative capacity on behalf of its homeowner members, pursuant to Code of Civil Procedure section 382. Although the 1976 version of CCP § 374 (effective after the complaint was filed but conceded to be retroactively applicable) only explicitly granted standing to associations of condominiums, community apartments, and undivided interest subdivisions for commonly owned areas, and the 1979 amendment extending standing to 'planned developments' for individually owned lots was a change in law rather than a clarification, the court found justification for a representative action under CCP § 382. This justification rests on considerations of 'necessity, convenience and justice,' given the 'social and economic realities' of widespread condominium-type housing, and the Association's ability to fairly protect the rights of its members who share a common interest in the outcome, as supported by precedents like Residents of Beverly Glen, Inc. v. City of Los Angeles and Salton City etc. Owners Assn. v. M. Penn Phillips Co. 2. Yes, the Developer and its employees, serving as the initial directors of the Association, breached their fiduciary duty by failing to establish an adequate reserve fund for maintenance and repair. As directors of a nonprofit corporation, they owed a fiduciary duty of good faith and loyalty to the Association and its members, analogous to that of a corporate promoter to shareholders. The Developer and its agents controlled the Association during its infancy and made decisions that benefited their own interests at the expense of the Association and its members, creating a conflict of interest. Their admitted failure to exercise supervisory and managerial responsibilities to assess each unit for an adequate reserve fund, despite knowing about specific maintenance problems due to the site's exposure, constituted an abdication of their obligation as initial directors. 3. The proper measure of damages for construction defects in a strict liability action is the cost of remedying the defects and repairing the property, together with the value of any lost use during the period of injury, rather than the diminution in market value. The trial court's reliance on the 'out-of-pocket' rule (Civil Code § 3343), which applies to fraud, was erroneous because the Association was not primarily relying on a fraud theory but on strict liability. Under Civil Code section 3333, which governs damages for tort actions, the purpose is to make the injured plaintiff whole. While diminution in value is a normal measure for real property injury, the reasonable cost of repair or restoration is another permissible and practical measure, as supported by Avner v. Longridge Estates and Stewart v. Cox. 4. Yes, the Association is entitled to nominal attorney fees on appeal for the cause of action pertaining to the breach of fiduciary duties. The declaration of 'Covenants, Conditions and Restrictions' authorized attorney fees for legal action taken by the Association to enforce its rights to assessments, and the breach of fiduciary duty cause of action was filed to enforce these provisions. The court has jurisdiction to make such an award where authorized by contract, and while the issue was not extensively briefed, the Association is entitled to nominal fees, with the precise amount to be determined by the trial court on remand.