Smart Corner Owners Assn. v. CJUF Smart Corner LLC ( 2021 )

Filed 5/20/21
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SMART CORNER OWNERS D076775
ASSOCIATION,
Plaintiff and Appellant,
(Super. Ct. No. 37-2017-
v. 00037690-CU-CD-CTL)
CJUF SMART CORNER LLC et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of San Diego County,
Ronald L. Styn, Judge. Reversed and remanded with directions.
Epsten, Anne L. Rauch, Trinette S. Sachrison, Gordon A. Walters;
Kasdan Lippsmith Weber Turner, Kenneth S. Kasdan, Michael D. Turner
and Brittany L. Grunau for Plaintiff and Appellant.
Lorber, Greenfield & Polito, Bruce W. Lorber, Robert B. Titus;
McCormick, Barstow, Sheppard, Wayte & Carruth and Scott M. Reddie for
Defendants and Respondents.
INTRODUCTION
Plaintiff Smart Corner Owners Association (the Association), a
California nonprofit mutual benefit corporation, filed a construction defect
action against the developers of a residential condominium tower. In 2019,
the trial court granted the developers’ motion for summary judgment on the
ground that the Association failed to obtain the consent of more than 50
percent of its condominium owner members before filing the instant action as
required by the governing declaration of covenants, conditions, and
restrictions (CC&Rs). In concluding the Association’s complaint was invalid,
the court rejected the Association’s argument that a subsequent vote of
ratification, held after the filing of the operative complaint, could satisfy the
member consent requirement. The court applied the holding of Branches
Neighborhood Corp. v. CalAtlantic Group, Inc. (2018) 26 Cal.App.5th 743(Branches), which involved a similar member vote requirement, and also
resulted in dismissal of an association’s construction defect claims.
After the Association filed its notice of appeal, the Legislature enacted
Civil Code section 5986,1 effective January 1, 2020. Section 5986 renders
prelitigation member vote requirements⎯like those at issue here and in
Branches⎯null and void. The newly enacted statute abrogates the defense
that noncompliance with such conditions defeats a construction defect claim.
(§ 5986, subd. (b).) The Legislature also expressly provided the statute would
apply retroactively “to claims initiated before the effective date of this
section, except if those claims have been resolved through an executed
settlement, a final arbitration decision, or a final judicial decision on the
merits.” (§ 5986, subd. (d), italics added.)
1 All undesignated statutory references are to the Civil Code unless
otherwise specified.
2
The Association seeks reversal of the judgment on the ground that its
claims had not yet been resolved through a “final judicial decision on the
merits” when section 5986 became effective, and it is therefore entitled to the
benefits of the new legislation. It also contends the prelitigation vote
requirement violates state public policy. We agree.
We conclude a “final judicial decision on the merits” within the
meaning of section 5986, subdivision (d), does not encompass a judgment that
was not final on appeal as of the statute’s effective date. Section 5986
therefore applies retroactively to the Association’s claims and compels
reversal of the judgment entered against it. We also hold, as an independent
ground for reversal, that the prelitigation vote requirement at issue in this
case violates fundamental state public policy. Accordingly, we reverse the
judgment and direct the trial court to enter a new order denying the
developers’ motion for summary judgment.
FACTUAL AND PROCEDURAL BACKGROUND2
I.
The Smart Corner Project
CJUF Smart Corner, LLC (CJUF), Canyon-Johnson Realty Advisors,
LLC, Canyon-Johnson Urban Fund, LP, Smart Corner, LLC (collectively, the
CJUF Group), and Lankford & Associates, Inc. (together with the CJUF
2 Consistent with the standard of review that applies to an order
granting summary judgment, we present the facts in the light most favorable
to the Association as the nonmoving party, “liberally construing [its]
evidentiary submission while strictly scrutinizing [Developers’] own showing,
and resolving any evidentiary doubts or ambiguities in [the Association’s]
favor.” (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768; Light v.
Dept. of Parks & Recreation (2017) 14 Cal.App.5th 75, 81.)
3
Group, the Developers) are an associated group of real estate owners and
developers.3 In 2004, CJUF contracted with Hensel Phelps Construction
Company (Hensel Phelps) for the construction of the Smart Corner
condominium project (Smart Corner or project) at 1080 Park Boulevard in
downtown San Diego. Smart Corner is a 19-story mixed-use development
with 301 residential units and common areas.
On May 24, 2007, the project architect issued its certificate of
substantial completion for the project. On May 24, the City of San Diego (the
City) issued a temporary certificate of occupancy for the project, although this
temporary certificate of occupancy was not extended and lapsed after 30
days. As of May 24, all but 25 of the project’s residential units lacked flooring
or appliances and could not be lawfully occupied. As of May 24, the City had
not yet completed its inspections of the project. Structural, fire alarm, fire
sprinklers, and electrical inspections were completed after May 24.
On July 6, 2007, the building failed its electrical system inspection. On
July 10, the building failed structural inspection; it did not pass structural
inspection until July 17. The City issued certificates of occupancy for 25
residential units and the common areas on July 6, and for the project
generally on July 17. The City continued to issue certificates of occupancy for
the remaining residential units in the months that followed. On July 10,
2007, CJUF recorded a notice of completion for the project.
3 CJUF was the developer of the Smart Corner project. Canyon-Johnson
Urban Fund, LP is a member and 85 percent owner of CJUF. Smart Corner,
LLC is a member and 15 percent owner of CJUF. Canyon-Johnson Realty
Advisors, LLC is the general partner of Canyon-Johnson Urban Fund, LP.
Lankford & Associates, Inc. entered into a development agreement with
CJUF to provide development services for the project.
4
On August 27, 2007, CJUF, as declarant,4 caused an amended and
restated declaration of CC&Rs to be recorded for Smart Corner. Among the
enumerated powers of the Association was the power under section 4.3.11 of
the CC&Rs to “initiate, defend, release, settle or intervene in mediation,
arbitration, judicial or administrative proceedings on behalf of the
Association in matters pertaining to . . . any and all claims, causes of action,
damages and suits for defects relating in any way to the design or
construction of the Association Property or Common Area or any portion
thereof, on behalf of the Owners . . . .”
Before the Association could initiate an action against CJUF, however,
the Association was required to comply with a prelitigation vote provision set
forth in section 4.4.4 of the CC&Rs (section 4.4.4), which stated:
“Members’ Approval of Certain Actions. In the event that any
claim or other actions brought by the Association against
Declarant, including, but not limited to, claims brought under
California Civil Code Section 895 et seq., or any other applicable
laws involving allegations of construction defects relating to the
Association Property or the Common Area that are not resolved
pursuant to the non-adversarial procedures set forth in California
Civil Code Sections 910 through 938, the Association shall not
4 The CC&Rs defined “declarant” to mean CJUF as well as its successors
or assigns, “if such successors and assigns acquire any or all of Declarant’s
interest in the Property for the purpose of purchase or sale, excluding any
Owners, and Declarant has expressly transferred or assigned to such
successors or assigns its rights and duties as Declarant to a portion or all of
the Project. For any successor or assignee of ‘Declarant’ to be deemed a
Declarant under the terms of this Declaration, Declarant shall record in the
County a certificate so designating said successor or assignee as Declarant.”
5
initiate a further action or procedure under Section 17.4 [5] or
otherwise without first obtaining the consent of the Owners other
than Declarant, constituting more than fifty percent (50%) of the
Owners of the Association at a meeting or election of the
Association conducted in accordance with the provisions of
California Corporations Code Sections 7510 et seq. and 7613.”
(Italics added.)
II.
The Construction Defect Action
A. The Association’s Notice of Construction Defect Claims
On July 6, 2017, the Association provided the CJUF Group and Hensel
Phelps with notice of a construction defect claim and notice of commencement
of legal proceedings under sections 895, et seq. and 910, et seq. of the Right to
Repair Act and section 6000 of the Davis-Stirling Common Development Act
5 Section 17.4, “Alternative Dispute Resolution,” provided that “[t]he
purpose of this Section 17.4 is to provide an expedited means of resolving any
claims, disputes and disagreements which may arise between an Owner and
the Association and Declarant after the close of escrow or other conveyance of
any portion of the Property by Declarant concerning the Property, that are
not resolved pursuant to any applicable statutory dispute resolution
procedures (individually referenced to herein as ‘Dispute’ and collectively as
‘Disputes.’).” It set forth provisions requiring mediation and arbitration of
Disputes.
6
(Davis-Stirling Act).6 The notice included a preliminary list of numerous
alleged defects, including defects in the project’s exterior barrier coating,
windows, door casings and doors, private decks, waterproofing, concrete,
bathtubs and showers, roof membrane and roof flashing, roof laps and seals,
tower floors, plumbing, venting, garage, and parking structure.
On September 5, 2017, the parties stipulated to extend until September
29 the deadline for completing statutory prelitigation requirements for
conducting a first visual inspection, and for the Developers’ service of
responses to the Association’s request for documents and production of
documents to the Association. On September 27, the CJUF Group and
Hensel Phelps notified the Association of their election to opt out of the Right
to Repair Act and Davis-Stirling Act prelitigation procedures.
On October 6, 2017, the Association filed a complaint against the CJUF
Group and Hensel Phelps, alleging causes of action for negligence, strict
liability, breach of warranties, and violation of construction standards set
forth in sections 896, et seq. In its operative first amended complaint filed
February 14, 2018, the Association asserted a single cause of action against
6 The Davis-Stirling Act was enacted in 1985 and “consolidated the
statutory law governing condominiums and other common interest
developments.” (Villa De Las Palmas Homeowners Assn. v. Terifaj (2004) 33
Cal.4th 73, 81 (Villa De Las Palmas).) The Davis-Stirling Act is now codified
at sections 4000 to 6150 of the Civil Code, formerly sections 1350 to 1376.
(See Rancho Mirage Country Club Homeowners Assn. v. Hazelbaker (2016) 2
Cal.App.5th 252, 258.) Section 6000 imposes requirements with which an
association must comply before filing construction defect claims against a
builder, developer, or general contractor of a common interest development.
(See § 6000, subds. (a) - (r).) Service of a notice of commencement of legal
proceedings under section 6000 tolls all applicable statutes of limitation and
repose. (§ 6000, subd. (b).)
7
the Developers7 and Hensel Phelps for violation of construction defect
standards under section 896, et seq.
In their respective answers to the first amended complaint, the
Developers asserted defenses based on the Association’s alleged non-
compliance with CC&R requirements for maintaining a claim, and based on
the running of the statute of repose in section 941, subdivision (a).8
On May 14, 2018, the Association filed the declaration of its attorney,
David Peters, who averred that while the Association did not agree that the
prelitigation voting provision in section 4.4.4 was enforceable, “by February
15, 2018, more than a majority of the members voted: (1) in favor [of] making
a claim under Article IV, Section 4.4.4, (2) filing a lawsuit and/or (3) to ratify
any past actions by the Board regarding the pursuant [sic] of construction
defect claims against the Declarant and other responsible entities.”
B. The Branches Decision
On August 24, 2018, Division Three of the Fourth District Court of
Appeal published Branches, a case involving alleged noncompliance with a
pre-claim vote requirement in the CC&Rs of a residential condominium
development. (Branches, supra, 26 Cal.App.5th at p. 749.) The association
filed a demand for arbitration of construction defect claims against a
developer without first obtaining the vote of at least 51 percent of its
7 Lankford & Associates, Inc. was not named as a defendant in the first
amended complaint. It was added as a defendant on October 18, 2018, when
the Association filed a Doe amendment substituting it as Doe 1 to the first
amended complaint.
8 Subdivision (a) of section 941 provides, “[e]xcept as specifically set forth
in this title, no action may be brought to recover under this title more than 10
years after substantial completion of the improvement but not later than the
date of recordation of a valid notice of completion.”
8
members as required by the community’s CC&Rs. (Id. at pp. 748–749.) The
association later held a membership meeting during which 92 of 93 members
present voted to ratify the prosecution of the construction defect claim
against the developer. (Id. at p. 748.)
The developer moved for summary judgment on the ground that the
association had failed to comply with the CC&Rs by obtaining owners’
consent to arbitration before the claim was filed. (Branches, supra, 26
Cal.App.5th at p. 749.) The arbitrator agreed, reasoning that because the
CC&Rs specified the requisite consent was to be obtained “prior to” initiating
a claim, the later ratification vote was ineffective. (Ibid.) The trial court
entered judgment confirming the arbitration award.
On appeal, the association argued the arbitrator had exceeded his
powers by issuing an award that violated the association’s “ ‘unwaivable’ ”
statutory right to ratification. (Branches, supra, 26 Cal.App.5th at p. 751.)
The appellate court found that none of the statutes cited by the association
established a right to ratification or prevented an association’s CC&Rs from
requiring member approval “[p]rior to” the board instituting a legal claim.
(Id. at pp. 753–757.)
The Branches court also rejected the association’s position that the
arbitrator’s decision violated state public policy favoring ratification.
(Branches, supra, 26 Cal.App.5th at pp. 757–758.) Rather, the court
concluded public policy favored placing limits on the authority of community
development associations. (Id. at pp. 757–758, citing §§ 4065, 4070, 4230,
4350, 4360, 4365, 5300, 5305, 5310 & 6150.)
The Branches court found particular relevance in section 6150, which
requires notice to the membership and a meeting before legal action may be
instituted against a developer. (Branches, supra, 26 Cal.App.5th at p. 758.)
9
In the court’s view, the member voting requirement in the CC&Rs merely
went “a step further” than section 6150 by “requiring affirmative consent of a
quorum of the members ‘prior to’ instituting such action.” (Ibid.) It viewed
the member voting requirement to be “consistent with the aims of the [Davis-
Stirling] Act⎯to balance the association’s need to operate efficiently with the
rights of its members to be informed and participate in decisions that could
impact the association for years, if not decades, to come.” (Ibid.) The court
further stated: “[The association] would have us believe that there is a ‘right
to ratify’ after the fact, as if that confers some benefit on the owners. It does
not; it ignores their explicit right to consent beforehand, before a road has
been taken that will be difficult, expensive, and time consuming.” (Ibid.)
Accordingly, the court affirmed confirmation of the arbitrator’s award
dismissing the association’s construction defect claims. (Ibid.)
C. The Developers’ Motion for Summary Judgment
In December of 2018, the Developers moved for summary judgment,
arguing there were no disputed issues of fact and the first amended
complaint failed as a matter of law, on two independent grounds. First, they
argued the statute of repose under section 941, subdivision (a), had started to
run on May 24, 2007, which they argued was the date of substantial
10
completion of the project using the prime construction contract’s definition of
“substantial completion,”9 and the action was therefore time-barred.
Second, relying on Branches, the Developers argued the complaint was
“invalid” because the Association had filed it without first obtaining consent
from the majority of its members, as required by section 4.4.4. They further
argued strict compliance with the CC&Rs was required under Branches and
therefore the February 15, 2018 member ratification vote was ineffective to
cure the original noncompliance. The Developers also claimed that because
the original complaint was invalid, the statute of repose had continued to run
and had lapsed, such that the Association had no time remaining in which to
bring a valid action based on the February 15 vote of ratification.
The Association opposed the Developers’ motion for summary
judgment. First, in response to the Developers’ statute of repose defense, the
Association argued the date of “substantial completion” for purposes of
section 941, subdivision (a), could not be contractually defined. The
Association also submitted evidence that it argued created triable issues of
fact as to whether the prime contract definition of “substantial completion”
had been satisfied by May 24, 2007. This evidence included that as of May
24, most units could not be lawfully occupied; the building had failed certain
9 According to the Developers’ summary judgment motion, “substantial
completion” was defined in the prime contract as occurring “when: (1) the
Work is sufficiently complete in accordance with the Contract Documents to
permit lawful occupancy and use thereof for its intended purpose, (2) a
temporary certificate of occupancy has been issued, (3) all Project utilities
have been installed and approved, (4) the Architect has issued its Certificate
of Substantial Completion, and (5) the Contractor has certified that all
remaining work will not interfere with the Owner’s use of the Project and is
capable of being completed within sixty (60) calendar days.”
11
inspections; subcontractors had not completed their work; and certificates of
occupancy were yet to be issued for most of the residential units.
Second, the Association argued that its complaint had not been
invalidated by alleged noncompliance with section 4.4.4. It claimed section
4.4.4 applied only to initiation of a mediation or arbitration, and not to the
filing of a civil action in superior court. It further argued that section 4.4.4
was unenforceable because it was procedurally and substantively
unconscionable. Section 4.4.4 had “maximum procedural unconscionability,”
the Association argued, because it was drafted before the Association came
into existence and was therefore akin to a contract of adhesion. And it was
substantively unconscionable because it forced the Association to “jump over
unnecessary hurdles before it can prosecute a claim against the Declarant for
construction defects.”
Finally, the Association argued the February 15, 2018 vote of
ratification by a majority of its members was effective to meet the member
consent requirement. The Association asserted that to the extent section
4.4.4 precluded members from validating board actions through ratification,
it violated public policy and amounted to an unreasonable servitude within
the meaning of section 5975, subdivision (a).10 It argued Branches was not
dispositive of its right to comply with a member consent requirement through
ratification, because the court in Branches considered only the narrow issue
of whether the arbitrator had exceeded his powers by violating an
“unwaivable” right of ratification, and had not been called to consider more
10 Civil Code section 5975, subdivision (a), provides, in part, that “[t]he
covenants and restrictions in the declaration shall be enforceable equitable
servitudes, unless unreasonable, and shall inure to the benefit of and bind all
owners of separate interests in the development.”
12
generally the scope of an association’s ability to cure non-compliance with
CC&Rs through ratification of board decisions.
D. The Trial Court’s Ruling
On July 22, 2019, the trial court issued a written ruling granting in
part and denying in part the Developers’ motion for summary judgment.11
The court denied the motion insofar as it was based on the alleged running of
the statute of repose. The court was unpersuaded that the agreed definition
of “substantial completion” in the construction contract governed
interpretation of section 941, subdivision (a). Even assuming the contractual
definition applied, the court found the Developers had failed to establish an
absence of triable issues of material fact that the project was substantially
completed by May 24, based on the evidence submitted by the Association.
The court noted the parties agreed that absent establishing a date of
substantial completion, the date of recording the notice of completion
commences the running of the statute of repose under section 941,
subdivision (a). The court further noted there was no dispute that the
Association’s notice of claim tolled the statute pursuant to section 927 and
the Developers argued “the 10-year statute of repose, as tolled by [the
Association’s] Notice of Claim, ran on November 17, 2017.” The court
11 Hensel Phelps filed a motion for summary judgment that was described
by the trial court as “substantially similar” to the summary judgment motion
filed by the Developers. As we discuss in footnote 13, post, in the same
written ruling in which it resolved the Developers’ summary judgment
motion, the court also ruled on Hensel Phelps’s summary judgment motion.
13
concluded that under this analysis, the Association’s original complaint was
timely filed on October 6, 2017.12
The court found merit, however, in the Developers’ contention that the
action was barred for noncompliance with section 4.4.4. The court found
Branches controlling. It rejected the Association’s contention that the holding
of Branches should be confined to cases involving confirmation of an
arbitration award. Rather, “Branches analyzes the substantive, legal issue of
enforcement of a CC&R member consent requirement and, as such, applies
irrespective of the forum.” “Under Branches,” the court concluded, “Plaintiff’s
failure to obtain the requisite consent of the membership prior to bringing
this action against the [Developers] renders [the Association’s] original
complaint invalid. The First Amended Complaint was also filed before [the
Association] obtained membership approval. Thus, the First Amended
Complaint is also invalid.” The court also rejected the Association’s public
12 Section 927 provides: “If the applicable statute of limitations has
otherwise run during this process, the time period for filing a complaint or
other legal remedies for violation of any provision of this title, or for a claim
of inadequate repair, is extended from the time of the original claim by the
claimant to 100 days after the repair is completed, whether or not the
particular violation is the one being repaired. If the builder fails to
acknowledge the claim within the time specified, elects not to go through this
statutory process, or fails to request an inspection within the time specified,
the time period for filing a complaint or other legal remedies for violation of
any provision of this title is extended from the time of the original claim by
the claimant to 45 days after the time for responding to the notice of claim
has expired. If the builder elects to attempt to enforce its own nonadversarial
procedure in lieu of the procedure set forth in this chapter, the time period for
filing a complaint or other legal remedies for violation of any provision of this
part is extended from the time of the original claim by the claimant to 100
days after either the completion of the builder’s alternative nonadversarial
procedure, or 100 days after the builder’s alternative nonadversarial
procedure is deemed unenforceable, whichever is later.”
14
policy and ratification arguments on the ground that identical arguments had
been rejected in Branches.
The court also rejected the Association’s contention that section 4.4.4
did not apply to civil claims, reasoning that the words “ ‘or otherwise’ ” in
section 4.4.4 were unambiguous and made clear the provision applied to civil
actions and not only to mediation or arbitration. Finally, the court found the
Association failed to establish that section 4.4.4 was procedurally
unconscionable based on Pinnacle Museum Tower Assn. v. Pinnacle Market
Development (US), LLC (2012) 55 Cal.4th 223 (Pinnacle),13 and that both
procedural and substantive unconscionability were required to render the
provision unenforceable.
13 In Pinnacle, the California Supreme Court explained that even if
CC&Rs could “perhaps be viewed as adhesive, a developer’s procedural
compliance with the Davis-Stirling Act provides a sufficient basis for
rejecting an association's claim of procedural unconscionability.” (Pinnacle,
supra, 55 Cal.4th at p. 248.)
15
On August 14, 2019, the court entered judgment for the Developers.
On August 15, the Developers filed a notice of entry of judgment. The
Association filed its notice of appeal on September 26.14
III.
Enactment of Section 5986
A. Senate Bill No. 326 (2019–2020 Reg. Sess.)
On August 30, 2019, after passage by the Legislature, the Governor
signed Senate Bill No. 326 (2019–2020 Reg. Sess.) (Senate Bill 326), which
added section 5986 to the Davis-Stirling Act, effective January 1, 2020.
(Stats. 2019, ch. 207, § 2.) The new legislation nullifies prelitigation member
vote provisions like those at issue here and in Branches and eliminates the
assertion of noncompliance with such requirements as a defense to
construction defect actions. (See § 5986, subd. (b).)
14 In the same July 22, 2019 minute order in which the trial court granted
in part and denied in part the Developers’ motion for summary judgment, the
court also denied Hensel Phelps’s summary judgment motion in its entirety.
Hensel Phelps then petitioned this court for a writ of mandate directing the
trial court to vacate its order denying the motion and enter an order granting
the motion. (Hensel Phelps Construction Co. v. Superior Court (2020) 44
Cal.App.5th 595, 601 (Hensel Phelps).) Hensel Phelps “primarily argued that
the date of substantial completion adopted by the parties to the contract
‘conclusively establishe[d]’ the date of substantial completion” under section
941, subdivision (a). (Hensel Phelps, at p. 601.) In Hensel Phelps, another
panel of this court denied the petition, holding the terms of the construction
contract did not conclusively establish the date of substantial completion
under section 941, and that “[s]ubstantial completion under the statute is a
factual issue, to be determined by the trier of fact based on competent
evidence concerning the actual state of construction of the improvement.”
(Hensel Phelps, at p. 616.)
16
The analysis in support of Senate Bill 326 described the need for
section 5986.15 Section 5986 was enacted to “ensure[ ] that developers cannot
use the governing structure of a homeowners association to escape liability.”
(Assem. Com. on Judiciary, Analysis of Sen. Bill 326, as amended June 24,
2019, p. 9.) One legislative analysis report explained:
“As part of the creation of a new HOA, the developer
typically begins laying the groundwork for the HOA’s future self-
governance. This includes establishing the initial governing
documents for the HOA, including the HOA’s ‘declaration’ [of]
covenants, conditions, and restrictions (CCRs). While the HOA
developer is still selling off the separate properties within the
HOA to homeowners, it is also common for the developer to serve,
or appoint people to serve, on the HOA board of directors. In
these ways, HOA developers exercise a great deal of control over
how the HOA will operate going forward, even though, over time,
the developer’s direct involvement with the HOA typically fades
away.
15 On April 2, 2021, we granted the Association’s unopposed amended
motion for judicial notice as to the following materials from the legislative
history of Senate Bill 326, which were presented as separate exhibits:
Exhibits A through G to the Association’s amended motion (consisting of
proposed and amended versions of Sen. Bill 326); Exhibit H (Sen. Com. on
Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019); Exhibit I (Sen. Com. on
Housing, Analysis of Sen. Bill 326, Mar. 27, 2019); Exhibit K (Sen. Rules
Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill 326, as
amended May 1, 2019); Exhibit L (Assem. Com. on Housing and Community
Development, Analysis of Sen. Bill 326, as amended June 12, 2019); Exhibit
M (Assem. Com. on Housing and Community Development, Background
Information Request for Sen. Bill 326); Exhibit N (Assem. Com. on Judiciary,
Analysis of Sen. Bill 326, as amended June 24, 2019); Exhibit O (Assem.
Judiciary Com., Mandatory Information Worksheet on Sen. Bill 326) Exhibit
P (Assem. Com. on Housing and Community Development, 3d reading
analysis of Sen. Bill 326, as amended July 3, 2019); and Exhibit Q (Sen.
Rules Com., Off. of Sen. Floor Analyses, Unfinished Business Analysis of Sen.
Bill 326, as amended July 3, 2019).
17
“The involvement of HOA developers in the creation of the
HOA’s initial government documents and the appointment of
early HOA board members can sometimes create conflicts of
interest because the HOA and the developer’s interests are not
necessarily aligned.
“[T]his bill addresses one such circumstance. In drafting
the governing documents for the HOAs they are creating,
developers sometimes add provisions that make it quite difficult
for the HOA to sue the developer in the event that construction
defects are discovered at the HOA. [¶] While it could be argued
that requiring a vote of the HOA members prevents the board of
directors from spending the HOA’s money on legal disputes
without the support of the members, the fact that these provisions
are limited to construction defect claims against the developer
suggests that more is afoot. Moreover, Civil Code Section 6150
already provides some protections against an overly litigious
board bent on suing the developer: it requires an HOA board to
hold a meeting of the members 30 days prior to filing a lawsuit,
stating its reasoning and laying out the options available to the
HOA. [¶] This bill ensures that developers cannot reap the benefit
of having taken advantage of their participation in the creation of
the HOA in this way.” (Sen. Rules Com., Off. of Sen. Floor
Analyses, 3d reading analysis of Sen. Bill 326, as amended May
1, 2019, pp. 6–7, italics added.)
Proponents of Senate Bill 326 pointed out that the bill “would be
consistent with a recent Supreme Court of Massachusetts ruling that
invalidated governing document provisions designed to inoculate the
developer against construction defect claims. That court found such
provisions to be void as against public policy, writing: [¶] ‘[i]t is overreaching
for a developer to impose a condition precedent that, for all practical
purposes, makes it extraordinarily difficult or even impossible for the [Board
of Directors] to initiate any litigation against the developers regarding the
common areas and facilities of a condominium. Such a provision has all the
same flaws as a waiver of liability provision — which we would find void as
18
contravening public policy — but without the transparency of such a
provision.’ (Trustees of the Cambridge Point Condominium Trust v.
Cambridge Point, LLC (2018) 478 Mass. 697, 709[(Cambridge Point)].)” (Sen.
Com. on Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019, p. 10.)
The legislative materials described developer-inserted preconditions to
litigation as “ ‘poison pill’ ” provisions that “make it prohibitively difficult for
HOAs to pursue claims against [developers].” (Assem. Judiciary Com.,
Mandatory Information Worksheet on Sen. Bill 326, pp. 1–2.) Branches was
cited as an example of a developer using such a provision to its benefit.
(Assem. Judiciary Com., Mandatory Information Worksheet on Sen. Bill 326,
pp. 1–3.)
B. Section 5986
Section 5986 has five subdivisions. Subdivision (a) confers the board of
an association with authority to commence and pursue a legal proceeding
against a declarant, developer, or builder of a common interest development,
and vests that authority solely in those board members that are unaffiliated
with the declarant, developer, or builder. (See § 5986, subd. (a).)
Subdivision (b) reads as follows: “The governing documents shall not
impose any preconditions or limitations on the board’s authority to commence
and pursue any claim, civil action, arbitration, prelitigation process pursuant
to Section 6000 or Title 7 (commencing with Section 895) of Part 2 of Division
2, or other legal proceeding against a declarant, developer, or builder of a
common interest development. Any limitation or precondition, including, but
not limited to, requiring a membership vote as a prerequisite to, or otherwise
providing the declarant, developer, or builder with veto authority over, the
board’s commencement and pursuit of a claim, civil action, arbitration,
prelitigation process, or legal proceeding against the declarant, developer, or
19
builder, or any incidental decision of the board, including, but not limited to,
retaining legal counsel or incurring costs or expenses, is unenforceable, null,
and void. The failure to comply with those limitations or preconditions, if
only, shall not be asserted as a defense to any claim or action described in this
section.” (Italics added.)
Subdivision (c) of section 5986 provides that provisions imposing
limitations or preconditions on the board’s authority to initiate claims are
valid and enforceable if “adopted solely by the nondeclarant affiliated
members of the association . . . in accordance with the requirements
necessary to amend the governing documents of the association.”
Subdivision (d) states: “This section applies to all governing documents,
whether recorded before or after the effective date of this section, and applies
retroactively to claims initiated before the effective date of this section, except
if those claims have been resolved through an executed settlement, a final
arbitration decision, or a final judicial decision on the merits.” (Italics
added.)
Subdivision (e) provides, in part, that “[n]othing in this section extends
any applicable statute of limitation or repose to file or initiate any claim, civil
action, arbitration, prelitigation process, or other legal proceeding.”
DISCUSSION
The Association contends section 5986 applies retroactively to this case
and compels reversal of the trial court’s order granting summary judgment to
the Developers based on its failure to obtain a membership vote before filing
its complaint under section 4.4.4 of the CC&Rs. It argues its claims had not
been resolved by “final judicial decision on the merits” within the meaning of
subdivision (d) when section 5986 became effective on January 1, 2020, and
20
that they are therefore not excluded from the general rule of retroactivity in
subdivision (d). The Association also seeks reversal on the ground that
section 4.4.4 is unenforceable because it violates public policy to the extent it
does not allow its members to consent to litigation by a vote of ratification.
The Developers argue the benefits of section 5986 are unavailable to
the Association because this action was resolved in a “final judicial decision
on the merits” before the effective date of the statute, when the trial court
entered judgment on August 14, 2019. The Developers also claim section
4.4.4 is not violative of fundamental state public policy, even if it excludes the
possibility of members consenting to construction defect litigation through a
vote of ratification.
I.
“Final Judicial Decision on the Merits” Means Appellate Finality
A. Standard of Review
A trial court’s grant of summary judgment is reviewed de novo. (Coral
Construction, Inc. v. City and County of San Francisco (2010) 50 Cal.4th 315,
326.) “On appeal from the granting of a motion for summary judgment, we
examine the record de novo, liberally construing the evidence in support of
the party opposing summary judgment and resolving doubts concerning the
evidence in favor of that party.” (Miller v. Department of Corrections (2005)
36 Cal.4th 446, 460.) “The trial court’s stated reasons for granting summary
judgment are not binding because we review its ruling not its rationale.”
(Canales v. Wells Fargo Bank, N.A. (2018) 23 Cal.App.5th 1262, 1268
(Canales).) “To the extent issues on appeal from a summary judgment
involve the interpretation of a statute, they are issues of law subject to
independent review.” (City of Malibu v. Santa Monica Mts. Conservancy
(2002) 98 Cal.App.4th 1379, 1383; see Bruns v. E-Commerce Exchange, Inc.
21
(2011) 51 Cal.4th 717, 724 [“[s]tatutory interpretation is a question of law
that we review de novo”]; Sacks v. City of Oakland (2010) 190 Cal.App.4th
1070, 1082 [where the pertinent facts are undisputed and the issue is one of
statutory interpretation, “ ‘the question is one of law and we engage in a de
novo review of the trial court’s determination’ ”].) The interpretation of the
terms of CC&Rs is also subject to our independent review where, as here, the
interpretation does not turn on the credibility of extrinsic evidence. (Harvey
v. The Landing Homeowners Assn. (2008) 162 Cal.App.4th 809, 817; Starlight
Ridge South Homeowners Assn. v. Hunter-Bloor (2009) 177 Cal.App.4th 440,
445.)
B. Principles of Statutory Interpretation
Civil statutes are presumed to operate prospectively “in the absence of
a clear indication of a contrary legislative intent.” (Quarry v. Doe 1 (2012) 53
Cal.4th 945, 955 (Quarry); see § 3 [“No part of [this code] is retroactive,
unless expressly so declared.”].) “In construing statutes, there is a
presumption against retroactive application unless the Legislature plainly
has directed otherwise by means of ‘ “express language of retroactivity or . . .
other sources [that] provide a clear and unavoidable implication that the
Legislature intended retroactive application.” ’ ” (Quarry, at p. 955.)
The parties do not dispute that subdivision (d) of section 5986 is a clear
expression of legislative intent for section 5986 to apply retroactively. They
also do not dispute the retroactive reach of section 5986 extends to claims
that were initiated and that remained pending at the time the statute
became effective. Where they differ, however, is on the scope of pending
claims to which the new legislation applies.
As we have noted, the dispute arises from the parties’ disagreement
over the meaning of the subdivision (d) phrase “final judicial decision on the
22
merits.” The Association contends that a judgment is not “final” under
California law as long as it remains subject to appeal, and since its appeal
was pending on January 1, 2020, when the statute became effective, its
claims had not yet been resolved through a “final judicial decision” within the
meaning of subdivision (d). The Association also argues that “on the merits”
in subdivision (d) means resolution “on substantive law grounds” and
excludes claims terminated for failure to comply with a developer-drafted
prelitigation vote requirement.
The Developers, unsurprisingly, offer a different interpretation of “final
judicial decision on the merits.” Citing Sullivan v. Delta Air Lines, Inc.
(1997) 15 Cal.4th 288, 303–304 (Sullivan), they argue that “final” can refer to
a trial court ruling that has become “final” because it has been reduced to
judgment. Under their view, the Association’s claims were resolved by a
“final judicial decision” when judgment was entered on August 14, 2019,
before the effective date of section 5986, making section 5986 inapplicable to
the Association’s claims. The Developers also contend that if a trial court
“substantively” addresses whether voting requirements in CC&Rs were met,
then its ruling is a decision “on the merits.”
In Aldea Dos Vientos v. CalAtlantic Group, Inc. (2020) 44 Cal.App.5th
1073 (Aldea), Division Six of the Court of Appeal, Second Appellate District
interpreted and applied the subdivision (d) phrase “final arbitration
decision.” However, no court of review of this state has yet interpreted the
phrase “final judicial decision on the merits.”
Our goal in interpreting statutes is “ ‘to ascertain the intent of the
enacting legislative body so that we may adopt the construction that best
effectuates the purpose of the law.’ ” (Klein v. United States of America
(2010) 50 Cal.4th 68, 77 (Klein), quoting Hassan v. Mercy American River
23
Hospital (2003) 31 Cal.4th 709, 715.) A step-by-step process of statutory
interpretation has been developed by the courts of this state. (See Mt.
Hawley Ins. Co. v. Lopez (2013) 215 Cal.App.4th 1385, 1396 (Lopez); Alejo v.
Torlakson (2013) 212 Cal.App.4th 768, 786-787 (Alejo).) The “ ‘key to
statutory interpretation is applying the rules of statutory construction in
their proper sequence . . . as follows: “we first look to the plain meaning of
the statutory language, then to its legislative history and finally to the
reasonableness of a proposed construction.” ’ ” (Lopez, at p. 1396.)
In the initial step, we examine “the words of the statute, ‘because the
statutory language is generally the most reliable indicator of legislative
intent.’ ” (Klein, supra, 50 Cal.4th at p. 77.) “When the statutory text is
ambiguous, or it otherwise fails to resolve the question of its intended
meaning,” we proceed to the second step, and “look to the statute’s legislative
history and the historical circumstances behind its enactment.” (Ibid.) “In
this step, courts may ‘turn to secondary rules of interpretation, such as
maxims of construction, “which serve as aids in the sense that they express
familiar insights about conventional language usage.” ’ ” (Alejo, supra, 212
Cal.App.4th at p. 787, quoting Flannery v. Prentice (2001) 26 Cal.4th 572, 579
(Flannery).)
“ ‘If ambiguity remains after resort to secondary rules of construction
and to the statute’s legislative history, then we must cautiously take the
third and final step in the interpretive process. [Citation.] In this phase of
the process, we apply “reason, practicality, and common sense to the
language at hand.” [Citation.] Where an uncertainty exists, we must
consider the consequences that will flow from a particular interpretation.’”
(Alejo, supra, 212 Cal.App.4th at p. 788.)
24
C. Application to Section 5986
1. Step One—Plain Meaning
In considering the text of section 5986, we give its words “a plain and
commonsense meaning.” (Flannery, supra, 26 Cal.4th at p. 577.) In doing so,
we do not “consider the statutory language in isolation”; “[r]ather, we look to
‘the entire substance of the statute . . . in order to determine the scope and
purpose of the provision . . . .’ ” (Id. at p. 578.) “When statutory language
includes words or terms that courts have previously construed, ‘the
presumption is almost irresistible’ that the Legislature intended them to
have the same ‘precise and technical’ meanings given by the courts.” (Hughes
v. Pair (2009) 46 Cal.4th 1035, 1046 (Hughes); accord, Richardson v. Superior
Court (2008) 43 Cal.4th 1040, 1050.) Thus, where the Legislature uses terms
“that have a well-settled judicial construction,” we may presume it intends
“that the terms retain the same meaning that the courts have placed upon
them . . . .” (Hughes, at p. 1046.)
With these concepts in mind, we consider the phrase “final judicial
decision on the merits.” The words “on the merits” have an accepted legal
meaning. They refer to the substantive elements of a claim or defense, as
distinguished from technical or procedural impediments to proceeding with a
claim. (Black’s Law Dict. (11th ed. 2019) p. 1185, col. 2 [defining “merits” as
“[t]he elements or grounds of a claim or defense; the substantive
considerations to be taken into account in deciding a case, as opposed to
extraneous or technical points, esp[ecially] of procedure”].) A ruling that a
claim is time-barred under the statute of limitations, for example, is
considered a “ ‘technical or procedural’ ” ground for disposing of a claim,
rather than a determination “ ‘on the merits.’ ” (Boyd v. Freeman (2017) 18
Cal.App.5th 847, 856; Koch v. Rodlin Enterprises (1990) 223 Cal.App.3d 1591,
25
1596 [“Termination of an action by a statute of limitations is deemed a
technical or procedural, rather than a substantive, termination. [Citation.]
‘Thus . . . dismissal on limitations grounds is in no way dependent on nor
reflective of the merits—or lack thereof—in the underlying action.’ ” ].)
Dismissal of a construction defect claim for failure to comply with the
timing requirement of a condition precedent to suit is analogous to
disposition on statute of limitations grounds, and is equally amenable to
being described as a technical or procedural resolution rather than a
resolution “on the merits.” Although the Developers characterize a court’s
adjudication of the defense of noncompliance with a vote requirement as a
“substantive” decision, they fail to cite any authority supporting their
assertion, and we find it unpersuasive.
Moreover, when considered in light of the full text of section 5986 and
its express intent to nullify prelitigation vote requirements and eliminate
their use as a defense, it seems highly unlikely the Legislature would exclude
from the statute’s retroactive reach claims that are disposed of on the very
defense it sought to abrogate. In Aldea, the court reasoned that the
subdivision (d) phrase “on the merits” modified “final arbitration decision” as
well as “final judicial decision,” and concluded that an arbitral award
dismissing an association’s construction defect claim for failure to strictly
comply with a member consent requirement “was not on the merits.” (Aldea,
supra, 44 Cal.App.5th at pp. 1079–1080.) We read the phrase similarly and
conclude the Legislature included the phrase “on the merits” in subdivision
(d) to indicate that claims terminated for noncompliance with prelitigation
voting requirements were not meant to be excluded from the statute’s
retroactive reach.
26
Although we find the phrase “on the merits” unambiguous, we cannot
say the same of the phrase “final judicial decision.” The term “final,” used as
it is here to describe a “judicial decision,” has more than one possible
meaning. The Association cites Manco Contracting Co. (W.L.L.) v. Bezdikian
(2008) 45 Cal.4th 192, 202 (Manco Contracting) for the proposition that “in
California a judgment is not final and conclusive between the parties when it
is on appeal, or for as long as it remains subject to appeal . . . .”
As the Developers point out, however, “finality on appeal is not the only
meaning of the phrase ‘final judgment.’ ” (Sullivan, supra, 15 Cal.4th at p.
303.) “In its most fundamental sense, ‘finality’ is an attribute of every
judgment at the moment it is rendered; indeed, if a judicial determination is
not immediately ‘final’ in this sense it is not a judgment, no matter what it is
denominated. The Legislature has incorporated this meaning of finality into
the very definition of a judgment: ‘A judgment is the final determination of
the rights of the parties in an action or proceeding.’ (Code Civ. Proc., § 577,
italics added.).” (Id. at p. 304.) “Finality in this sense not only makes a
judicial determination a judgment, it also makes that judgment appealable.”
(Ibid.) The Developers thus argue the Association’s claims were resolved by
“final judicial decision” when the trial court’s minute order granting their
dispositive motion was reduced to judgment. Given the discussion in
Sullivan of the different meanings of finality, we cannot disagree that “final”
can reasonably mean finality after appeal, as advocated by the Association, or
a trial court decision reduced to final judgment, as urged by the Developers.
The Legislature’s use of the words “judicial decision” suggests the
Association’s interpretation is probably the one the Legislature intended.
“Judicial” is a general term that refers equally to a trial court, appellate
court, or a high court of review. (See Cal. Const., art. VI, § 1 [“The judicial
27
power of this State is vested in the Supreme Court, courts of appeal, and
superior courts, all of which are courts of record.”].) Had the Legislature
meant to exclude from the retroactive reach of section 5986 claims that had
already been resolved in the trial court, it could easily have done this by
inserting the words “trial court” in place of “judicial.” (See, e.g., Manco
Contracting, supra, 45 Cal.4th at p. 203 [interpreting California’s Uniform
Foreign-Country Money Judgments Recognition Act; reasoning that “[i]f the
Legislature had intended to restrict the meaning of ‘final’ ” to refer “only to
finality in the trial court, i.e., a judgment that is not interlocutory,” “it could
have easily added the phrase ‘in the trial court’ after ‘final’ ”].)
Similarly, the Legislature’s use of the word “decision” rather than
“judgment” suggests it had a broader scope of tribunals in mind, since
judgments are issued only by trial courts (see, e.g., Code Civ. Proc., § 577 [“A
judgment is the final determination of the rights of the parties in an action or
proceeding.”]; Aixtron v. Veeco Instruments Inc. (2020) 52 Cal.App.5th 360,
384 [under the “ ‘ “one final judgment rule,” ’ ” “ ‘ “ ‘an appeal may be taken
only from the final judgment in an entire action’ ” ’ ”]), whereas courts of all
levels issue decisions (Vazquez v. Jan-Pro Franchising Internat. (2021) 10
Cal.5th 944, 952–953 [referring to Dynamex Operations W. v. Superior Court
(2018) 4 Cal.5th 903 as a “judicial decision”]; Martinez v. Combs (2010) 49
Cal.4th 35, 66 [describing United States v. Silk (1947) 331 U.S. 704, 713 as a
“judicial decision”]; In re Thomas (2018) 30 Cal.App.5th 744, 761–762
[referring to “ ‘decisions’ ” of the California Courts of Appeal]).
However, although we find it likely the Legislature intended “final
judicial decision on the merits” to have the meaning advanced by the
Association, we cannot confidently reject the Developers’ interpretation based
solely on an examination of the statutory text. Accordingly, we proceed to the
28
next step and consider the legislative history of section 5986. (Jones v. Lodge
at Torrey Pines Partnership (2008) 42 Cal.4th 1158, 1162–1163 [“statutory
language is not plain” where “[i]ts language does lend itself to plaintiff’s
interpretation, but . . . that is not the only reasonable interpretation . . . .”].)
2. Step Two—Legislative History and Maxims of Construction
(i) Legislative History
“If [a statute] is susceptible of multiple interpretations . . . we will
divine the statute’s meaning by turning to a variety of extrinsic sources,
including the legislative history [citation], the nature of the overall statutory
scheme [citation], and consideration of the sorts of problems the Legislature
was attempting to solve when it enacted the statute [citation].” (Clayworth v.
Pfizer, Inc. (2010) 49 Cal.4th 758, 770.) “In addition, an ‘examination of the
original text of the statute and the evolution of the language’ of a statute that
has been amended is ‘useful in ascertaining its current meaning.’ ” (Lopez,
supra, 215 Cal.App.4th at p. 1400, quoting Ailanto Properties, Inc. v. City of
Half Moon Bay (2006) 142 Cal.App.4th 572, 586 (Ailanto Properties).)
As detailed above, legislative analyses of Senate Bill 326 explained that
section 5986 was enacted to end a trend of developers taking advantage of
their ability, early in the formation of condominium associations, to insert
provisions into CC&Rs which make it more difficult for the association to sue
them for construction defects. (Assem. Com. on Judiciary, Analysis of Sen.
Bill 326, as amended June 24, 2019, p. 9; Sen. Rules Com., Off. of Sen. Floor
Analyses, 3d reading analysis of Sen. Bill 326, as amended May 1, 2019, pp.
6–7.) The bill was meant to “ensure[ ] that developers cannot reap the
benefit of having taken advantage of their participation in the creation of the
HOA in this way.” (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading
analysis of Sen. Bill 326, as amended May 1, 2019, p. 7.) Cambridge Point,
29
the Massachusetts Supreme Court case, was cited favorably for its holding
that developer-drafted conditions precedent to a suit that increased the
difficulty of initiating litigation against developers contravened public policy.
(Sen. Com. on Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019, p. 10.)
Branches was offered as an example of a developer’s successful employment
of the disfavored defense. (Assem. Judiciary Com., Mandatory Information
Worksheet on Sen. Bill 326, pp. 1–3.)
Subdivision (d) was proposed to make the statutory nullification of such
provisions, and the defenses based on them, retroactive. (Sen. Com. on
Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019, p. 10.) As originally
drafted, the text of subdivision (d) of section 5986 stated: “This section
applies to all governing documents, whether recorded before or after the
effective date of this section, and applies retroactively to any claims initiated
before the effective date of this section.” (Sen. Amend. to Sen. Bill 326, Mar.
27, 2019, p. 6, original italics omitted; our italics added.)
The bill’s author later proposed an amendment to subdivision (d)
“strik[ing] out ‘section’ and insert[ing]: [‘]section, except if those claims have
been resolved through an executed settlement, a final arbitration decision, or
a final judicial decision on the merits.[’] ” (Sen. Com. on Judiciary, Analysis
of Sen. Bill 326, Mar. 27, 2019, p. 13, amend. 21.)
An analysis report prepared for the Senate Committee on Judiciary
explained the impetus for the proposed amendment:
“As it appears in print, the bill would apply retroactively,
not just to any governing documents sitting around out there, but
also to pending construction defect claims. Even if it makes
policy sense for the bill to nullify these self-serving provisions
within existing HOA governing documents generally, this general
rule becomes more problematic when applied to pending claims.
Historically, this Committee has sought to avoid interfering with
or altering the outcome of pending litigation. Nonetheless, as the
30
Massachusetts Supreme Court’s decision [in Cambridge Point]
suggests, these provisions raise such concern that the courts
might well find them void as against public policy regardless of
whether this bill passes. The Committee might find retroactive
application to pending claims appropriate under that narrow
circumstance.
“At the same time, the language in the bill is written so
broadly that it could be interpreted to allow for the revival of
lapsed claims or claims that have already been resolved on their
merits. That this is not the bill’s intent and the author proposes
to offer an amendment in Committee that would limit the bill’s
retroactivity to claims that are not time-barred and that have not
been resolved on their merits.” (Sen. Com. on Judiciary, Analysis
of Sen. Bill 326, Mar. 27, 2019, pp. 10–11, italics added.)
To address the issues set forth in the foregoing comments, amendments
were proposed to “clarify that the bill’s provisions regarding nullification of
specified provisions within an HOA’s governing documents do not apply to
claims that are time-barred or that have reached final resolution on their
merits.” (Sen. Com. on Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019, p.
11, italics added.)
The proposed amendment to subdivision (d) was approved in committee
and voted into the bill on May 1, 2019. The amendment remained in Senate
Bill 326 through passage by the Legislature without further change. (See §
5986, subd. (d).)
Two aspects of this history draw our attention. First, developer-
drafted, prelitigation member vote requirements were viewed as clearly
violative of public policy. Retroactive abrogation of defenses based on failure
to comply with these requirements, even in the context of “pending litigation”
or “pending claims,” was considered appropriate under the circumstances.
Second, subdivision (d) was amended to ensure the statute’s retroactivity
provision was appropriately circumscribed so it did not result in “reviv[ing]”
31
claims that had “reached final resolution on their merits.” (Sen. Com. on
Judiciary, Analysis of Sen. Bill 326, Mar. 27, 2019, p. 11.)
We believe the separation of powers doctrine lends clarity to the line
the Legislature was attempting to draw in amending subdivision (d) to
restrict the scope of its retroactive application. The separation of powers
doctrine holds that one branch of the government cannot exercise essential
powers that our state Constitution has delegated to another branch. (Perez v.
Roe 1 (2006) 146 Cal.App.4th 171, 176–177 (Perez).) “A core function of the
Legislature is to make statutory law . . . . A core function of the judiciary is
to resolve specific controversies between parties.” (Id. at p. 177.) Thus,
“[w]hen cases become final for separation of powers purposes, the Legislature
may not . . . bind the courts with an after-the-fact declaration of legislative
intent.” (Ibid.) As the United States Supreme Court has explained in the
context of the parallel federal separation of powers doctrine, “[w]hen
retroactive legislation requires its own application in a case already finally
adjudicated, it does no more and no less than ‘reverse a determination once
made, in a particular case.’ ” (Plaut v. Spendthrift Farm, Inc. (1995) 514 U.S.
211, 225 (Plaut); see People v. Bunn (2002) 27 Cal.4th 1, 5 (Bunn) [following
Plaut, and finding Plaut “both consistent with California law and persuasive
for state separation of powers purposes”].)
However, “[s]eparation of powers principles do not preclude the
Legislature from amending a statute and applying the change to both
pending and future cases, though any such law cannot ‘readjudicat[e]’ or
otherwise ‘disregard’ judgments that are already ‘final.’ ” (Bunn, supra, 27
Cal.4th at p. 17.) “Because the judicial branch consists of a hierarchy of
courts—from district courts and appellate courts to the Supreme Court
itself—a judgment has no conclusive effect for separation of powers purposes
32
until the time for appeal has passed, or an appeal has been pursued and the
review process is completed. Therefore, separation of powers principles are
not implicated, and a lower court decision has not been unconstitutionally
altered, when a reviewing court applies a new retroactive statute to cases
still pending on appeal.” (Perez, supra, 146 Cal.App.4th at p. 179, citing
Plaut, supra, 514 U.S. at pp. 226–227.) “[O]nly those decisions that represent
‘the final word of the [judicial] department as a whole,’ as expressed by ‘the
last court in the hierarchy that rules on the case’ ” are constitutionally
protected from the effects of retroactive legislation. (Bunn, at p. 21.)
The Legislature is presumed to have been aware of the relevant law (In
re W.B. (2012) 55 Cal.4th 30, 57) and of the limits of its powers (Young v.
Department of Fish & Game (1981) 124 Cal.App.3d 257, 277). We infer from
these presumptions and from the legislative history discussed above, that in
amending subdivision (d), the Legislature was attempting to avoid
overstepping the limits of its constitutional legislative authority while still
allowing for the broadest possible scope of pending claims to be affected by
section 5986. The Legislature’s concern about the overbreadth of subdivision
(d) as originally drafted, together with the statements that affecting “pending
litigation” was acceptable under the “circumstances” while “reviv[ing]” claims
that had been finally resolved was not, support this view. Likewise, that
Senate Bill 326 was designed to “ensure[ ] that developers cannot reap the
benefit of having taken advantage of their participation in the creation of the
HOA . . . ,” the citation to Branches in the legislative materials as an example
of a developer benefitting from such a misuse of authority, and the expressed
view that developer-inserted “ ‘poison pill’ ” provisions violated public policy
by making it more difficult for associations to hold developers accountable for
construction defects, are all indications of legislative intent for section 5986
33
to affect pending construction defect litigation to the extent of its authority to
do so. (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of
Sen. Bill 326, as amended May 1, 2019, p. 7; Assem. Judiciary Com.,
Mandatory Information Worksheet on Sen. Bill 326, pp. 1–2.)
We thus conclude from our analysis of the legislative history of section
5986 in general, and the amendment to subdivision (d) of section 5986 in
particular, that the Legislature intended “final judicial decision” to refer to a
judgment for which the time to appeal had passed, or, if an appeal was taken,
had reached finality after completion of the process of appellate review.
(ii) Maxims of Construction
This interpretation is further supported by the structure of subdivision
(d), which establishes retroactivity as the general rule, and makes claims
resolved through “final judicial decision on the merits” the exception. At the
second stage of statutory interpretation, we may consider maxims of
construction. (See Lopez, supra, 215 Cal.App.4th at p. 1411.) One such
principle holds that statutory exceptions are to be narrowly or strictly
construed. (See Carter v. Cohen (2010) 188 Cal.App.4th 1038, 1051
[“Exceptions to the general rule of a statute are to be strictly construed and,
in interpreting exceptions to the general statute, courts include only those
circumstances which are within the words and reason of the exception.”];
Maracich v. Spears (2013) 570 U.S. 48, 60 [“An exception to a ‘general
statement of policy’ is ‘usually read . . . narrowly in order to preserve the
primary operation of the provision.’ ”]; C.I.R. v. Clark (1989) 489 U.S. 726,
739 [“In construing provisions . . . in which a general statement of policy is
qualified by an exception, we usually read the exception narrowly in order to
preserve the primary operation of the provision.”].)
34
Applying this principle and construing “final judicial decision” narrowly
supports the view that “final judicial decision” encompasses only those claims
resolved to appellate finality. This interpretation results in fewer cases being
excluded from the statute’s retroactive reach, and thus serves subdivision
(d)’s primary purpose of retroactivity. The Developers’ interpretation, by
contrast, excludes a greater range of cases from the statute’s retroactive
effects, frustrating the overall purpose of the statute and contravening the
rule favoring a narrow interpretation of exclusionary clauses.
3. Step Three—Reason, Practicality, and Common Sense
After considering the statute’s legislative history and the structure of
subdivision (d), we are persuaded that “final judicial decision” means a
decision that has been reduced to judgment and has reached finality after
completion of the appellate process, or that has become final because the time
to appeal has passed.
Although it is unnecessary to do so, we note that this interpretation is
consistent with reason and common sense. (See, e.g., Lopez, supra, 215
Cal.App.4th at p. 1417 [“Although it is not necessary to do so, we confirm our
interpretation of [the statute], by applying ‘reason, practicality, and common
sense to the language’ of the statute.”], citing Ailanto Properties, supra, 142
Cal.App.4th at p. 591 [“Although our review of the legislative history suffices
to support our conclusion, applying ‘reason, practicality, and common sense to
the language at hand’ confirms that conclusion.”].)
Interpreting “final judicial decision” to encompass claims resolved to
finality in the trial court, but to exclude claims pending on appeal, makes
little sense. Doing so would create the possibility of judicial enforcement of a
provision that our Legislature has already declared in the strongest possible
terms⎯through explicit statutory directive⎯should be treated as null and
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void. It would also raise the potential for affirming a ruling that disposed of
a case for noncompliance with such a provision, despite the legislative
declaration that such defenses can no longer be asserted. In practical terms,
this would mean that associations chronologically advantaged because their
claims, for whatever reason, were not reduced to final judgment by January
1, 2020, would be entitled to the full benefits of section 5986 and would see
previously-dismissed claims restored, whereas associations whose claims
were resolved before that point and were pending on appeal on January 1,
2020, would not. We see little to be gained, as a matter of policy or
pragmatics, from drawing such a distinction. Accordingly, we decline to do
so.
4. Conclusion—Interpretation of “Final Judicial Decision on the
Merits”
Our examination of the text, legislative history, and structure of section
5986, subdivision (d), as confirmed by considerations of reason and common
sense, leads us to conclude that a “final judicial decision” under subdivision
(d) means a judgment for which the time to appeal had passed, or, if an
appeal was taken, had reached finality after completion of the process of
appellate review. We have already found that “on the merits” does not
encompass a claim disposed of for noncompliance with a condition precedent
to litigation like the one contained in section 4.4.4.
Thus, the Association’s claims had not been resolved by a “final judicial
decision on the merits” when section 5986 became effective, and they are not
excluded from the statute’s retroactive reach. Accordingly, subdivision (b) of
section 5986 applies. Under subdivision (b), “[a]ny limitation or precondition
[in the governing documents of an association], including, but not limited to,
requiring a membership vote as a prerequisite to . . . the board’s
commencement and pursuit of a claim . . . is unenforceable, null, and void.
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The failure to comply with those limitations or preconditions, if only, shall
not be asserted as a defense to any claim or action described in this section.”
The trial court granted summary judgment based on the Developers’
defense that the Association failed to comply with section 4.4.4 by filing its
complaint and first amended complaint without first obtaining the consent of
a majority of owners. Subdivision (b) abrogates this defense and renders the
member vote precondition on which it was based null and void. As the
judgment is now without a legal basis, we will reverse it.
II.
Section 4.4.4 Violates Fundamental State Public Policy
As an independent ground for reversal of the judgment, the Association
argues that section 4.4.4, as interpreted by the trial court to require the
Association to obtain member approval before filing suit and to disallow
member approval by a later vote of ratification, violates fundamental state
public policies. The Association notes that the trial court was compelled to
follow Branches, which was controlling law at the time it ruled on the
Developers’ summary judgment motion. It urges that we should now reject
the holding of Branches and follow Aldea instead.
We agree. As an independent basis for reversing the judgment, we
conclude, like the court in Aldea, that section 4.4.4 “contravenes explicit
legislative expressions of public policy.” (Aldea, supra, 44 Cal.App.5th at p.
1077.) We also join Aldea in registering our disagreement with Branches to
the extent it held otherwise.
Civil Code section 5975, subdivision (a), provides, in relevant part, that
“[t]he covenants and restrictions in the declaration shall be enforceable
equitable servitudes, unless unreasonable, and shall inure to the benefit of
and bind all owners of separate interests in the development.” “[C]ovenants
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and restrictions in recorded declarations of common interest developments
are presumptively reasonable [citation], and are enforceable ‘unless they are
wholly arbitrary, violate a fundamental public policy, or impose a burden on
the use of affected land that far outweighs any benefit’ [citation].” (Villa De
Las Palmas, supra, 33 Cal.4th at p. 88.) “Equity will not enforce any
restrictive covenant that violates public policy. [Citations.] Nor will courts
enforce as equitable servitudes those restrictions that are arbitrary, that is,
bearing no rational relationship to the protection, preservation, operation or
purpose of the affected land.” (Nahrstedt v. Lakeside Village Condominium
Assn. (1994) 8 Cal.4th 361, 381 (Nahrstedt); Pinnacle, supra, 55 Cal.4th at p.
239 [“Although Nahrstedt spoke specifically in terms of land use restrictions,
its analysis logically extends to all covenants in a declaration, which by
statute are also enforceable as equitable servitudes unless unreasonable.”].)
In Aldea, the court examined a voting requirement, much like the one
at issue here, that required a condominium association to obtain the consent
of a majority of owners before filing a claim. (Aldea, supra, 44 Cal.App.5th at
p. 1076.) The association failed to obtain owner consent prior to filing its
demand for arbitration, but later obtained the approval of 99 percent of its
members to continue with the arbitration. (Ibid.) The arbitrator granted the
developer’s motion to dismiss based on the association’s failure to comply
with the vote requirement prior to beginning arbitration, and the trial court
confirmed the award. (Ibid.)
On appeal, Division Six of the Second Appellate District found the vote
requirement, and the arbitral award enforcing it, violative of explicit
legislative expressions of state public policy. (Aldea, supra, 44 Cal.App.5th at
pp. 1077–1079.) The policies it identified included those supporting quality
residential construction. (Id. at p. 1077, citing Health & Saf. Code, § 50001
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[“ ‘housing is of vital statewide importance to the health, safety, and welfare
of the residents of this state . . . .’ ”]; §§ 896 [listing construction defects for
which the developer is liable], 897 [developer liable for defects not expressly
listed], 941, subd. (a) [10-year statutory period in which to bring a
construction defect action].)
The Aldea court also found the vote requirement unreasonable and
unconscionable and thus violative of the prohibition in section 5975,
subdivision (a), against enforcement of unreasonable provisions in CC&Rs,
particularly as interpreted by the arbitrator to prohibit consent through
ratification after the claim was filed. (Aldea, supra, 44 Cal.App.5th at p.
1077.) The provision gave the developer “veto power over the Association’s
claims in spite of the members’ vote to proceed with the arbitration.” (Ibid.)
The court disagreed with Branches that such a requirement benefits
members and “ ‘balance[s] the association’s need to operate efficiently with
the rights of its members to be informed and participate in decisions that
could impact the association for years, if not decades, to come.’ ” (Id. at p.
1078, quoting Branches, supra, 26 Cal.App.5th at p. 758.) The Aldea court
had a pithy response: “But the members voted to ratify the Association’s
decision to arbitrate. It is an odd benefit that deprives the members of the
right to proceed with an arbitration they voted to undertake.” (Aldea, supra,
44 Cal.App.5th at p. 1078.) The Aldea court further noted that the vote
provision did not “inform the Association or its members of the devastating
effect the failure to comply will have on its rights, or that the initial failure to
comply, no matter how inadvertent, will be irremediable.” (Id. at pp. 1078–
1079.)
We agree with the Aldea court’s discussion and adopt its reasoning. We
find its assessment of state public policy particularly persuasive since it is
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consonant with the legislative history of Senate Bill 326 and the concerns
that motivated the Legislature to enact section 5986. The commentary in the
relevant legislative analysis noted that at the time of the bill’s authorship,
common interest developments accounted for “approximately a quarter of the
state’s overall housing stock . . . .” (Sen. Com. on Judiciary, Analysis of Sen.
Bill 326, Mar. 27, 2019, p. 5.) “[T]he laws overseeing such developments have
a large impact on the population.” (Ibid.) In this case alone, the Association
stands for the interests of the inhabitants of 301 residential units. Within
this context, the identified trend in developer-created impediments to
construction defect suits by condominium associations becomes a matter of
public welfare. The same legislative analyses looked askance at the notion
that developers insert such provisions for the rational purpose of fostering
informed decision-making. “[T]he fact that these provisions are limited to
construction defect claims against the developer suggests that more is afoot.”
(Id. at p. 9.)
We conclude, like Aldea, that the requirement in section 4.4.4 that
prohibited the Association from instituting litigation against the Developers
without first obtaining the consent of a majority of the owners violates
fundamental state policy by making it more difficult for the Association to
hold Developers accountable for construction defects. We also find section
4.4.4 unreasonable, unconscionable and violative of the fundamental state
policy against unreasonable servitudes insofar as it requires strict
compliance as a precondition to suit and prohibits members from providing
their consent later through a vote ratifying a board decision to file suit.
Thus, even if we were to conclude that section 5986 did not apply
retroactively to the Association’s claims, we would reverse the judgment on
the basis that section 4.4.4 violates fundamental public policy.
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III.
Developers’ Remaining Arguments
The Developers oppose reversal on certain grounds we have not yet
addressed.
First, the Developers contend the Association, in its opening brief on
appeal, failed to challenge the trial court’s ruling that the complaint and first
amended complaint were invalid as a matter of law for failure to comply with
section 4.4.4, and the Association has therefore forfeited this challenge to the
judgment. Because we find the Developers’ contention to be an obvious
mischaracterization of the Association’s appellate brief, we need not and do
not address it further.
Next, the Developers advance a complicated argument that we
summarize as follows: the Association’s original complaint was unauthorized
for failure to comply with section 4.4.4; the 10-year statute of repose under
section 941, subdivision (a), started to run no later than July 10, 2007 (the
date of recordation of the notice of completion), and because the original
complaint was invalid, it continued to run to expiration before the February
15, 2018 ratification vote; the ratification vote was therefore ineffective to
cure the original complaint’s invalidity; because subdivision (e) of section
5986 does not extend statutes of repose, it is now too late for the Association
to file a new complaint based on the February 15, 2018 ratification vote;
therefore, the Association’s complaint remains unauthorized and invalid, and
we should affirm the judgment.
The chief, but not the only, problem with this logic emerges at step one.
Since we have concluded section 5986 applies retroactively to the
Association’s claims, its original complaint can no longer be characterized as
unauthorized for noncompliance with section 4.4.4. Since the remainder of
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the Developers’ argument depends on the validity of this first step, we reject
the argument in its entirety.
Finally, the Developers contend that in the event we reverse the trial
court’s grant of summary judgment, we should remand for further
proceedings so they can conduct discovery to determine whether the
Association amended its CC&Rs to add a new provision with a valid member
consent precondition to suit. We decline to do so. The Developers cite no
authority that would support allowing them this opportunity. Essentially,
the Developers seek to conduct additional discovery under Code of Civil
Procedure section 437c, subdivision (h), but this provision only applies to the
party opposing summary judgment; the Developers were the moving party.
The Developers also fail to indicate how evidence of a new voting provision in
the CC&Rs would be relevant to the summary judgment motion they already
filed, which was based on section 4.4.4.
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DISPOSITION
The judgment is reversed and the matter is remanded with directions
that the trial court vacate its order granting the Developers’ motion for
summary judgment and issue a new order denying that motion. The
Association is entitled to its costs on appeal.
DO, J.
WE CONCUR:
HUFFMAN, Acting P. J.
GUERRERO, J.
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