Gertrude M. LAMDEN, Plaintiff and Appellant, v. LA JOLLA SHORES CLUBDOMINIUM HOMEOWNERS ASSOCIATION, Defendant and Respondent.
Plaintiff Gertrude M. Lamden, trustee of the Lamden Family Trust, appeals a judgment after court trial favoring defendant La Jolla Shores Clubdominium Homeowners Association (Association) on her first amended complaint for declaratory relief and injunction. Lamden contends the court erred in determining that Association's decision to treat termite infestation locally instead of fumigating an entire building was proper under the business judgment rule. (Corp.Code, § 7231.) 1 Concluding the business judgment rule was inapplicable here, we reverse the judgment.
Lamden owned a unit in the La Jolla Shores Clubdominium complex (the complex). For several years, Lamden's unit had serious termite problems. Lamden believed that nothing less than tenting and fumigating her entire building (primary treatment) was acceptable to correct the problems. However, declining to fumigate, Association opted instead for extermination of termites in local spots (secondary treatment) and during renovation or reconstruction of various portions of the complex. Without success Lamden complained to Association that its actions against the termites were inadequate.
Eventually, Lamden sued Association for declaratory and injunctive relief. Lamden alleged Association breached its responsibility under Civil Code 2 section 1364 3 and the project's Declaration of Restrictions (the Declaration) to repair and maintain the complex's common areas as occasioned by the presence of termite infestation. Specifically, Lamden asserted Association should have effected primary treatment of her building's common areas to eradicate the termites. In defense, asserting its good faith actions taken after considering various factors were consistent with the business judgment rule, Association contended Lamden was not entitled to declaratory or injunctive relief.
In granting judgment favoring Association, the trial court declined to determine whether Association's actions were objectively reasonable under all the circumstances. Instead, applying the business judgment rule, the court concluded that regardless whether objectively reasonable Association's decisions were unassailable under the business judgment rule.
We state the facts in the light most favorable to respondent Association.
In 1971 the complex opened with three separate four-story stucco and wood frame buildings adjoining the Pacific Ocean. The three buildings contained a total of 104 to 106 units, each with a wooden deck or patio.
In July 1971 the complex's developers recorded the Declaration creating Association as the “management body” to provide for the “management, maintenance and preservation” of the complex's common areas. (Declaration, § 5.1.) 4 Section 3.1 of the Declaration provided those common areas were owned by the unit owners as tenants-in-common in equal, undivided shares. Under the Declaration's sections 7.1.7 and 7.1.8, Association's Board of Governors (the Board) had the right and power to maintain and repair the common areas. Section 12.1 of the Declaration provided: “The limitations, restrictions, conditions and covenants set forth in this Declaration constitute a general scheme for (i) the maintenance, protection and enhancement of value of the Project and all Condominiums and (ii) the benefit of all Owners. Said limitations, restrictions, conditions and covenants are imposed on each Condominium for the benefit of every other Condominium and the present and future Owners thereof. Said limitations, restrictions, conditions and covenants are and shall be covenants running with the land or equitable servitudes, as the case may be.” The Declaration's section 12.3 provided that any breach of those limitations, restrictions, conditions or covenants (other than by failure to pay assessments) could “be enjoined, abated or remedied by appropriate legal proceedings” by “any Owner,” and that “[d]amages at law for any such breach are hereby declared to be inadequate.”
In 1973 Lamden and her husband bought unit 375, one of 42 units in the complex's largest building (Building Three). Until 1977 the Lamdens resided in New York and used their unit as a rental. From 1977 until 1988 the Lamdens lived in the unit. Since 1988 the unit has been used as a rental.
The complex's buildings and decks were poorly designed with disregard for waterproofing. The structures did not have flashing or adequate slopes for drainage. The resulting intrusion of water into Lamden's unit created moist conditions ideal for rot and termites.
From 1987 to 1989 Association hired general contractor Wayne to renovate exterior siding in areas of all three buildings. Wayne removed and replaced all of Building Three's exposed southern walls including the portion around Lamden's unit 375. Altogether, about 75 percent of the renovation project involved removal and replacement of siding. Further, Wayne replaced underlying drywall exhibiting water damage, mold and mildew. Wayne also replaced damaged underlying framing members. During the siding project Wayne found little evidence of active termite infestation. However, when Wayne discovered any termite infestation, a termite extermination company provided spot treatment and then removed and replaced damaged material.
In 1990 while renovating the inside of her unit, Lamden and her tenant discovered termites. Association's manager had termite extermination company Antimite spot treat the area locally.
In June 1991 Lamden and her downstairs neighbor Holladay in unit 275 received a report on a termite inspection they commissioned. The report indicated the presence of termites in several places on their property and recommended fumigation.
In September 1991 Association received a termite report it commissioned from Western Exterminator Company. Recommending fumigation, Western's report indicated termites were present in all three buildings, primarily in damaged wood related to fungus and water damage in walkways and balcony areas. Western proposed to fumigate all three buildings for $118,000 with a one-year guarantee except for floor coverings and other items with a thirty-day guarantee. Western would also guarantee to provide localized treatment when termites reappeared.
In 1991 Association's Board decided not to fumigate. The Board based its decision not to fumigate on the cost of fumigation, the expense and logistical problems of relocating people during fumigation, concerns about the effect of fumigation residue on residents' health and safety, the fact that planned walkway renovations would include replacement of damaged areas, the expense of moving pets, the cost to repair anything broken by the termite company, potential claims for lost rental income, and the probability that tenting would provide only short-term benefits since termites were endemic to wood in coastal areas and would likely soon reinfest the property requiring spot treatment. Instead of fumigating, Association's Board decided to implement Western's report's secondary recommendation of spot treating the infested framing until evidence indicated the problem was more widespread. Association engaged Antimite to treat termites locally when found.
Meanwhile, in 1991 Association hired Wyer Corporation to repair damage done by water intrusion to all four units in Building Three ending in the number 75 (the “Stack 75” project). Wyer stripped the entire balcony area down to the framing and repaired the decks. Wyer also repaired the intersection of the deck with the wall, creating better sheet metal and waterproofing of the existing decking.
In 1992 Wayne did additional repairs to the siding of unit 275's south wall and its east wall going into the patio. Wayne also built additional support to the patio post. Wayne saw signs of termite infestation or damage in the wall members and rim joists of the patio area. The affected area was spot treated, damaged material removed and the framing replaced.
In 1993 and 1994 Wayne renovated the complex's existing bridge walkway system for about $1.6 million. The walkways' substrata had been damaged 90 percent by water intrusion and 10 percent by termites. Included in the renovation project were reconstruction of the surface material with a new waterproofing system, addition of a spot deck drain, installation of new sheet metal and a new waterproofing system where the wall met the terrace level, repair of most vertical posts exhibiting dry rot resulting from upward permeation of water, and installation of post footings. Association spent $130,000 to replace damaged substrata including $13,000 spent on termite damage. Decisions involving structural integrity were made by a structural engineer. An onsite architect ensured the design was installed according to plans and reviewed change orders.
Meanwhile, in June 1993 Tallon Termite and Pest Control issued a report offering to treat unit 275 and unit 375 to eradicate termites and provide a two-year guarantee against infestation.
In August 1993 Lamden retained counsel to demand that the Association repair and correct unit 275 and unit 375.
In April 1994 responding to Association's property manager's question if any termites were seen in the area of unit 375 during the renovation project, Wayne stated no unusual dry rot or termites were found in the terrace of Stack 75.
SUPERIOR COURT PROCEEDINGS
In May 1994 during the walkway renovation project, Lamden filed this lawsuit against Association.
In September 1994 Lamden filed a first amended complaint asserting causes of action for breach of the Declaration, negligent failure to maintain common areas, breach of fiduciary duty, breach of duty of ordinary care, negligence, negligence per se, mandatory injunction, and declaratory relief. Lamden alleged Association breached its responsibility imposed by statute and the Declaration to take adequate action to repair and maintain the complex's common areas to eradicate wood-destroying pests and organisms.
In September 1994 answering Lamden's first amended complaint, Association affirmatively alleged its conduct was reasonable and in conformity with the business judgment rule of Corporations Code section 7231.
In October 1995 the matter came for court trial. At trial Lamden waived her right to recover money damages and proceeded to seek only declaratory and injunctive relief. The parties agreed Association was responsible for the repair and maintenance of the complex's common areas occasioned by the presence of wood-destroying pests or organisms. However, the parties disputed whether Association was responsible to effect primary rather than secondary treatment to the common areas. Specifically, asserting Association's Board's actions to treat termites were inadequate and below the standard of reasonable care, Lamden sought a mandatory injunction requiring Association to repair termite damage and have a licensed exterminator fumigate the entirety of Building Three plus provide a guarantee. Association responded that Lamden failed to establish entitlement to a mandatory injunction since she did not meet her burden to demonstrate the Board's decision was in noncompliance with the business judgment rule.
Lamden presented expert testimony that although no one could guarantee that termites would not return to the property after fumigation, the decision by Association's Board not to fumigate was unreasonable because fumigation would give the property a fresh start in light of the fact it would take several years for termites to become entrenched again. Over Lamden's objection, Association presented expert testimony by Attorney Howell that the Board's decision complied with the business judgment rule.
After trial, concluding Association's Board was not negligent, did not breach a fiduciary or statutory duty and did not otherwise commit a wrongful act, the superior court declined to grant Lamden declaratory or injunctive relief. The court characterized its task as determining whether in deciding not to fumigate the Board violated section 1364 by acting arbitrarily, without any rational business judgment or in bad faith. Although noting that undisputed “overwhelming” evidence indicated termites had been a problem for the past several years, active infestation might be present in some portions of the project possibly causing future structural collapse absent remedial steps, fumigation would provide a fresh start and “to a certain degree” the Board failed to take adequate action to treat the termites, the court declined to “second-guess” the Board's decision since Board members had “a rational basis for their decision to reject fumigation” and “acted in good faith and in a manner that they believed to be in the best interests of the Association and were reasonably prudent.” Specifically, the court found the work Wayne undertook for the Board was reasonable; the Board took appropriate action to remedy the problems created by water intrusion; the Board obtained and considered the $118,000 bid for fumigation of all three buildings; and there was no evidence that structural collapse was imminent. The court also found the Board balanced various other factors including residents' relocation costs, lost rental income on rented units, concerns about plants and pets, the possibility that workers tenting for termites might exacerbate the roof's water leakage problems, the likelihood termites would reappear after tenting, and concerns whether fumigation posed dangers to human health. Further, the court stated “one or two unit holders cannot dictate what the other 40 are going to do and ignore the business judgment.” Additionally, although suggesting that Association consider “some building-wide treatment,” the court stated a mandatory order of fumigation would create hardship to other residents and was “too intrusive based upon the evidence in this case.”
In December 1995 the court entered judgment favoring Association.
In February 1996 the court awarded Association $40,000 attorney fees.
At trial the parties agreed Association was responsible for the repair and maintenance of the condominium project's common areas occasioned by the presence of wood-destroying pests or organisms. However, the parties disputed whether Association's performance of its responsibility should be assessed under an objective standard of reasonableness or under the business judgment rule focusing on Association's good faith. Asserting that by not eradicating termites from common areas surrounding her unit Association breached its “clear” duties arising under section 1364 and the Declaration as determined under an objective standard of reasonableness, Lamden contends the trial court erred as a matter of law in analyzing Association's actions under the business judgment rule instead of under such objective standard. Agreeing with Lamden that the court applied the wrong standard in assessing Association's alleged breach of its responsibility involving termite treatment, we conclude Lamden is entitled to a new trial.5
Association's Duty of Repair and Maintenance
Lamden contends statutory law, the provisions of the Declaration and principles of common law imposed on Association an objective duty of reasonable care in repairing and maintaining the project's common areas near Lamden's unit as occasioned by the presence of termites. We agree.
Association was statutorily responsible for the repair and maintenance of common areas occasioned by the presence of wood-destroying pests or organisms including termites. (§ 1364.) 6 Under the law of equitable servitudes, Lamden could properly enforce such statutory responsibility by suit against Association. (Franklin v. Marie Antoinette Condominium Owners Assn. (1993) 19 Cal.App.4th 824, 832, 23 Cal.Rptr.2d 744.) Further, the language of section 1364 expressly contemplated Association's responsibility would include “prompt, effective treatment of wood-destroying pests or organisms.” (Id. at subd. (d)(1).)
The Declaration provided Association was to provide for the management, maintenance, repair and preservation of the complex's common areas for the enhancement of the value of the project and each unit as well as for the benefit of all owners. (Declaration, §§ 5.1, 7.1.7, 7.1.8, 12.1.) In essence, Association's “overall function” was to “protect and enhance” the complex's “economic value.” (O'Connor v. Village Green Owners Assn. (1983) 33 Cal.3d 790, 796, 191 Cal.Rptr. 320, 662 P.2d 427; Declaration, § 12.1.) Established principles of condominium law permitted a unit owner to seek an injunction compelling a condominium association to enforce a declaration's provisions. (Posey v. Leavitt (1991) 229 Cal.App.3d 1236, 1246-1247, 280 Cal.Rptr. 568.) Thus, Lamden could properly enforce under the law of equitable servitudes Association's Declaration-imposed responsibility to maintain and repair the common areas. (Franklin v. Marie Antoinette Condominium Owners Assn., supra, 19 Cal.App.4th at p. 832, 23 Cal.Rptr.2d 744; § 1354, subd. (a) 7 ; Declaration, §§ 12.1, 12.3.) Further, even if such responsibility were construed as not imposing a duty or obligation on Association 8 , to the extent Association exercised such responsibility by undertaking to repair and maintain the common areas Association was held to the same standard of care as a trustee acting for compensation. (Declaration, § 7.1.16.) A compensated trustee was under a standard of care requiring such trustee to exercise the judgment and care exercised by persons of prudence, discretion and intelligence in managing their own affairs. (Estate of Collins (1977) 72 Cal.App.3d 663, 669, 139 Cal.Rptr. 644; former Prob.Code, § 16040, subd. (a); Prob.Code, § 16041.9 )
In Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 229 Cal.Rptr. 456, 723 P.2d 573, the Supreme Court stated that a condominium homeowner's association could not enforce a declaration of covenants, conditions and restrictions “in a way that violates statutory or common law.” (Id. at p. 499, fn. 6, 229 Cal.Rptr. 456, 723 P.2d 573.) Characterizing the condominium association as “for all practical purposes” the project's landlord, the Supreme Court observed that “traditional tort principles impose on landlords, no less than on homeowner associations that function as a landlord in maintaining the common areas of a large condominium complex, a duty to exercise due care for the residents' safety in those areas under their control.” (Id. at p. 499, 229 Cal.Rptr. 456, 723 P.2d 573.) Supporting its “conclusion that a condominium association may properly be held to a landlord's standard of care as to the common areas under its control” (id. at pp. 499-500, 229 Cal.Rptr. 456, 723 P.2d 573), the Supreme Court cited O'Connor v. Village Green Owners Assn., supra, 33 Cal.3d 790, 191 Cal.Rptr. 320, 662 P.2d 427, and White v. Cox (1971) 17 Cal.App.3d 824, 95 Cal.Rptr. 259. (Frances T. v. Village Green Owners Assn., supra, at pp. 499-500, 229 Cal.Rptr. 456, 723 P.2d 573.) In O'Connor v. Village Green Owners Assn., supra, noting the homeowner's association was charged with maintaining and repairing all common areas of the project, the Supreme Court stated “the association performs all the customary business functions which in the traditional landlord-tenant relationship rest on the landlord's shoulders.” (Id. at p. 796, 191 Cal.Rptr. 320, 662 P.2d 427.) In White v. Cox, supra, 17 Cal.App.3d 824, 95 Cal.Rptr. 259, recognizing that under the statutory scheme an owner of a condominium unit lacked any effective control over the condominium association acting as a management body, the appellate court permitted the owner to sue the association for damages for personal injuries resulting from the association's negligence in maintaining a sprinkler in a common area. (Id. at p. 830, 95 Cal.Rptr. 259.) The appellate court observed that the unit owner in fact “had no more control over operations than he would have had as a stockholder in a corporation which owned and operated the project.” (Ibid.)
Similar to the situation in Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d 490, 229 Cal.Rptr. 456, 723 P.2d 573, traditional tort principles impose on landlords a duty to exercise due care for their tenants' property. “The basic policy of this state, as contained in section 1714 of the Civil Code, is that every person is responsible for injuries caused to others by his failure to use ordinary care or skill in the management of his property.” (Brennan v. Cockrell Investments, Inc. (1973) 35 Cal.App.3d 796, 800, 111 Cal.Rptr. 122.) Hence, “a landlord must act toward his tenant as a reasonable person under all of the circumstances․” (Id. at pp. 800-801, 111 Cal.Rptr. 122.) Further, regardless “whether a landlord in a particular situation is bound to make repairs, once he undertakes a repair, he must then use ordinary care.” (Minoletti v. Sabini (1972) 27 Cal.App.3d 321, 324, 103 Cal.Rptr. 528.)
In sum, section 1364, the provisions of the Declaration and principles of common law taken together imposed upon Association an objective duty of reasonable care to undertake effective action to repair and maintain common areas as occasioned by the presence of termites. However, instead of analyzing Association's termite-related actions under such objective standard, the trial court applied the business judgment rule to uphold Association's actions. As we shall explain, under the circumstances here application of the business judgment rule was error.
Inapplicability of the Business Judgment Rule
Association contends the trial court properly applied the business judgment rule in determining whether Association's Board's decision to treat termites locally satisfied Association's termite-related responsibility imposed by statute, Declaration or principles of common law. We conclude such determination should have been made under an objective standard of reasonableness.
Corporations Code section 7231 codifies for nonprofit directors the standard of fiduciary responsibility commonly referred to as the business judgment rule. (Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d at pp. 506, fn. 13, 507, 229 Cal.Rptr. 456, 723 P.2d 573.) The legislative comments indicate Corporations Code section 7231 incorporates the standard of care defined in Corporations Code section 309 10 for determining the personal liability of directors for breaching their fiduciary duty to a profit corporation. (Id. at p. 506, fn. 13, 229 Cal.Rptr. 456, 723 P.2d 573.)
“California courts (like courts elsewhere) apply the common law ‘business judgment rule’ in determining directors' liability for breach of their duty of care. Under this rule, courts will not review directors' business decisions, or hold directors liable for errors or mistakes in judgment, so long as they were: [¶] Disinterested and independent; [¶] Acting in good faith; and [¶] Reasonably diligent in informing themselves of the facts.” (Friedman, Cal. Practice Guide: Corporations (Rutter 1997) § 6:245 rev. # 1, 1997, italics in original.) “The common law ‘business judgment rule’ refers to a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. The business judgment rule is premised on the notion that those to whom the management of the corporation has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is one which is ‘ “ ․ helpful to the conduct of corporate affairs or expedient for the attainment of corporate purposes ․,” ’ and establishes a presumption that directors' decisions are based on sound business judgment.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263, 256 Cal.Rptr. 702.)
Stated otherwise, “ ‘[t]he business judgment rule is a “presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” ’ ” (Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352, 1366, 27 Cal.Rptr.2d 681.) Such presumption means that the plaintiff challenging the board's decision “has the burden of showing the decision involved a conflict of interest, or was made in bad faith (e.g., fraudulently) or without the requisite degree of care and diligence.” (Friedman, Cal. Practice Guide: Corporations, supra, § 6:245 rev. # 1, 1997.) “ ‘A hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter's decision can be “attributed to any rational business purpose.” ’ ” (Katz v. Chevron Corp., supra, at p. 1366, 27 Cal.Rptr.2d 681.) Instead “ ‘[u]nder the business judgment rule[,] director liability is predicated upon concepts of gross negligence.’ ” (Ibid.; Friedman, supra, § 6:245.1 rev. # 1, 1995.11 )
Thus, under the business judgment rule, a “mistake of judgment on the part of a board of directors does not justify taking the control of corporate affairs from the board of directors and placing it with the stockholders. The board of directors may make incorrect decisions, as well as correct ones, so long as it is faithful to the corporation and uses its best business judgment.” (Findley v. Garrett (1952) 109 Cal.App.2d 166, 178, 240 P.2d 421.) Stated otherwise, “neither a court nor minority shareholders can substitute their business judgment for that of a corporation where its board of directors has acted in good faith and with a view to the best interests of the corporation and all its shareholders. [Citations.] ‘The power to manage the affairs of a corporation is vested in the board of directors․ “Every presumption is in favor of the good faith of the directors. Interference with such discretion is not warranted in doubtful cases.” ’ ” (Beehan v. Lido Isle Community Assn. (1977) 70 Cal.App.3d 858, 865, 137 Cal.Rptr. 528.) Instead, to “ ‘ “․ warrant interference by a court in favor of minority stockholders ․ a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interest, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company.” ’ ” (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852, 47 Cal.Rptr. 392.)
In sum, the business judgment rule provides that “a director is not liable for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co., supra, 208 Cal.App.3d at p. 1263, 256 Cal.Rptr. 702.) “ ‘ “Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonably exercised by them․” ’ ” (Id. at p. 1264, 256 Cal.Rptr. 702.) Hence, courts will generally “uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development's governing documents, and comply with public policy.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374, 33 Cal.Rptr.2d 63, 878 P.2d 1275; Liebler v. Point Loma Tennis Club (1995) 40 Cal.App.4th 1600, 1613, 47 Cal.Rptr.2d 783.) However, as we shall explain, the trial court here should not have applied the business judgment rule in determining whether Association's actions satisfied its responsibility with respect to treating termites.
In Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d 490, 229 Cal.Rptr. 456, 723 P.2d 573, the Supreme Court observed: “The business judgment rule has been justified primarily on two grounds. First, that directors should be given wide latitude in their handling of corporate affairs because the hindsight of the judicial process is an imperfect device for evaluating business decisions. Second, ‘[t]he rule recognizes that shareholders to a very real degree voluntarily undertake the risk of bad business judgment; investors need not buy stock, for investment markets offer an array of opportunities less vulnerable to mistakes in judgment by corporate officers.’ [Citation.] Of course, a tort victim cares little whether the tortfeasor acted in good faith to maximize the interests of the enterprise. Unlike shareholders challenging an unprofitable decision, a tort victim's exposure to the risk of harm is generally involuntary and uncompensated. And unlike the review of business judgments that affect only the pecuniary interests of investors, courts have a long and distinguished record of deciding whether a defendant's personal conduct imposed an unreasonable risk of injury on the plaintiff.” (Id. at p. 507, fn. 14, 229 Cal.Rptr. 456, 723 P.2d 573.)
Hence, in Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d 490, 229 Cal.Rptr. 456, 723 P.2d 573, the Supreme Court distinguished between a “director's fiduciary duty to the corporation (and its beneficiaries)” under the business judgment rule defined statutorily by Corporations Code section 7231 and “the director's ordinary duty to take care not to injure third parties” defined by common law tort principles. (Id. at p. 506, 229 Cal.Rptr. 456, 723 P.2d 573; Smith v. Superior Court (1990) 217 Cal.App.3d 950, 953-954, 266 Cal.Rptr. 253.) In rejecting a contention the director's duty to third parties was under the statutory standard of care defined in the business judgment rule, the Supreme Court stated the business judgment rule “does not abrogate the common law duty which every person owes to others-that is, a duty to refrain from conduct that imposes an unreasonable risk of injury on third parties.” (Frances T. v. Village Green Owners Assn., supra, at p. 507, 229 Cal.Rptr. 456, 723 P.2d 573.) The Supreme Court characterized the business judgment rule as applying only “to parties (particularly shareholders and creditors) to whom the directors owe a fiduciary obligation.” (Ibid.)
Under the circumstances here, Lamden had a “dual relationship” with Association. (Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d at p. 513, 229 Cal.Rptr. 456, 723 P.2d 573.) Association's governors (directors) were fiduciaries “required to exercise their powers in accordance with the duties imposed by the Corporations Code. [Citation.] This fiduciary relationship [was] governed by the statutory standard that requires directors to exercise due care and undivided loyalty for the interests of the corporation.” (Ibid., citing Corp.Code, §§ 309, subd. (a), 7231, subd. (a).) However, Association and Lamden also stood “in a common law relationship, similar to that of landlord and tenant.” (Frances T. v. Village Green Owners Assn., supra, at p. 513, 229 Cal.Rptr. 456, 723 P.2d 573.) Such common law relationship required that in performing its responsibility to maintain and repair the common areas occasioned by the presence of termites, Association was to exercise reasonable care to protect Lamden's unit from undue damage. (Ibid.) As in Frances T., those “two relationships and respective standards of care are related in this case only insofar as they concern the same parties.” (Ibid.) As such, those relationships and standards of care “must be analyzed separately․” (Ibid.)
In sum, similar to the situation in Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d 490, 229 Cal.Rptr. 456, 723 P.2d 573, Lamden sought declaratory and injunctive relief against Association on the theory Association as landlord “breached its duty to her as a tenant rather than as a shareholder.” (Id. at p. 514, 229 Cal.Rptr. 456, 723 P.2d 573.) Thus, the standard of care applicable to Association's performance of maintenance and repair to the common areas occasioned by the existence of termites was provided by common law tort principles rather than by the business judgment rule. (Id. at pp. 506-507, 513-514, 229 Cal.Rptr. 456, 723 P.2d 573.) Hence, the trial court erred in applying the business judgment rule as an affirmative defense barring Lamden's claims for declaratory and injunctive relief.12
Application of Erroneous Standard Prejudiced Lamden
As noted, the parties agreed at trial that Association was responsible for the repair and maintenance of the project's common areas occasioned by the presence of wood-destroying pests or organisms. Based upon evidence that Association made prudent inquiry, considered various pertinent factors and proceeded in good faith, the court concluded Association established its affirmative defense of the business judgment rule.
However, as discussed, application of the business judgment rule was erroneous. Since Association effectively functioned as the project's landlord with respect to repairing and maintaining the complex's common areas, traditional tort principles imposed on Association in its capacity as landlord the duty to exercise reasonable care for Lamden's property in performing such repair and maintenance. (Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d at p. 499, 229 Cal.Rptr. 456, 723 P.2d 573.) Asserting Association breached such duty by using inadequate methods to protect her building's common areas surrounding her unit from serious and continuous termite infestation, Lamden proceeded on the theory the trial court's task was to determine the objective reasonableness of Association's actions under all the circumstances. Instead, the trial court stated it would not second-guess Association's actions as long as its directors satisfied the business judgment rule by acting “in good faith,” “in a manner that they believe[d] to be in the best interests of the Association” and were “reasonably prudent.”
On this record Lamden was prejudiced by the trial court's erroneous conclusion that Association's establishing the affirmative defense of the business judgment rule ended the case. Ample evidence indicated that termite infestation continued in inaccessible areas of Lamden's building and thus Association's local treatment eradicating termites on the building's outside and interior walls constituted only a “partial solution” inadequate to correct the ongoing termite problem. Specifically, Lamden presented expert testimony indicating termites had burrowed into inaccessible areas in Lamden's unit, primary treatment was a recommendation required by the Structural Pest Control Board where an inspection revealed infestations to be numerous or in inaccessible areas not amenable to control by local treatment only, the entirety of Building Three needed tenting and fumigation to remedy the termite problem in Lamden's unit, and Association acted unreasonably by not properly responding to the known termite problem. Evidence also indicated that between September 1989 and October 1995 the complex's buildings were inspected for termites 54 times with primary treatment recommended on 48 of those occasions. Lamden thus established a prima facie case by presenting evidence Association had the responsibility to repair and maintain the common areas as occasioned by the presence of termites, in performing such responsibility Association did not comply with its duty of reasonable care, and such negligence caused Lamden's damages. (Frances T. v. Village Green Owners Assn., supra, 42 Cal.3d at p. 503, 229 Cal.Rptr. 456, 723 P.2d 573.) Hence, if the trial court had analyzed Association's actions under an objective standard of reasonableness rather than erroneously applying the business judgment rule, it is reasonably likely an outcome more favorable to Lamden would have resulted.
A New Trial Is Required
Since the trial court's decision was based on inapplicable legal principles and prejudiced Lamden, the judgment must be reversed. (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 815, 148 Cal.Rptr. 22, 582 P.2d 109.) Lamden contends in reversing the judgment we should also direct the superior court to enter judgment in her favor directing Association to complete primary treatment of her building with an effective warranty of at least one year within a reasonable time to be specified by the superior court. However, on this record we decline to direct entry of judgment favoring Lamden.
Although not proceeding on the theory its actions were objectively reasonable under the totality of the circumstances, Association presented expert testimony at trial that its actions were in good faith so as to satisfy the business judgment rule. Specifically, such evidence indicated Association's Board decided to treat the termites locally rather than fumigating after considering various factors including the exterminator's report, the guarantee provided, the planned renovations, fumigation costs, costs of relocating unit owners and their tenants, the lack of termite complaints from residents other than Lamden and Holladay, the opinions of the structural engineer and the construction supervisor, and the health risks to people and pets. Upon determining such evidence established Association's affirmative defense of the business judgment rule, the court granted judgment for Association without determining whether the Board's decision to perform its maintenance and repair responsibility by spot local treatment of termites rather than fumigation satisfied an objective standard of reasonableness. However, the evidence about various matters considered by the Board in reaching its termite treatment decision would also appear to have some relevance on the issue whether Association's actions were objectively reasonable. Since the ultimate decision in this lawsuit thus turns on disputed factual matters not yet resolved, this record does not permit entry of judgment favoring Lamden. Instead, any such potential result awaits completion of a new trial.
The judgment is reversed. Appellant shall have costs on appeal.
1. Corporations Code section 7231, part of the Nonprofit Mutual Benefit Corporations Law, provides:“(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.“(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:“(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;“(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence; or“(3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.“(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person's obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by the corporation are dedicated.”
FN2. All statutory references are to the Civil Code unless otherwise specified.. FN2. All statutory references are to the Civil Code unless otherwise specified.
3. Section 1364, subdivision (b)(1), provides generally that a condominium association is responsible for repairing and maintaining common areas as occasioned by the presence of wood-destroying pests including termites.
4. The Declaration provided that “common areas” meant common areas as defined under the recorded condominium plan and included “bearing walls, columns, floors, roofs, foundations, elevator equipment and shafts, central heating, central refrigeration and central air conditioning equipment, reservoirs, chutes, conduits, wires and other utility installations, wherever located, except those wires and other utility installations located within a Unit which serve only that particular Unit.” (Declaration, § 1.1.6.)
5. Lamden also contends as a tenant-in-common in the common areas managed by Association she had standing to enjoin Association from committing waste by not adequately repairing, replacing or maintaining those common areas. Further, asserting she expected the common areas to be maintained in suitable fashion, the Declaration prohibited her from doing any repairs to the common areas, and the trail of rotted lumber left by termites materially affected health and safety, Lamden contends that Association as her landlord breached its implied warranty of habitability by not keeping the common area free of termites. However, in light of our conclusion the judgment must be reversed on the ground the court applied the wrong standard in determining whether Association breached any responsibility involving termite treatment, we do not discuss Lamden's theories of waste or breach of the implied warranty of habitability. Similarly, we need not decide whether the trial court properly admitted the testimony of Association's legal expert Howell.
6. Section 1364 provides in relevant part:“(a) Unless otherwise provided in the declaration of a common interest development, the association is responsible for repairing, replacing, or maintaining the common areas, other than exclusive use common areas, and the owner of each separate interest is responsible for maintaining that separate interest and any exclusive use common area appurtenant to the separate interest.“(b)(1) In a community apartment project, condominium project, or stock cooperative, as defined in Section 1351, unless otherwise provided in the declaration, the association is responsible for the repair and maintenance of the common area occasioned by the presence of wood-destroying pests or organisms.“(2) In a planned development as defined in Section 1351, unless a different maintenance scheme is provided in the declaration, each owner of a separate interest is responsible for the repair and maintenance of that separate interest as may be occasioned by the presence of wood-destroying pests or organisms. Upon approval of the majority of all members of the association, the responsibility for such repair and maintenance may be delegated to the association, which shall be entitled to recover the cost thereof as a special assessment.“(c) The costs of temporary relocation during the repair and maintenance of the areas within the responsibility of the association shall be borne by the owner of the separate interest affected.“(d)(1) The association may cause the temporary, summary removal of any occupant of a common interest development for such periods and at such times as may be necessary for prompt, effective treatment of wood-destroying pests or organisms.”
7. Section 1354, subdivision (a), provides: “The 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. Unless the declaration states otherwise, these servitudes may be enforced by any owner of a separate interest or by the association, or by both.”
8. The Declaration's section 7.1.16 provided in part that no right or power conferred on the Board under article VII “shall be construed as a duty, obligation or disability charged upon the Board or any Governor.” However, section 7.1.16 further provided: “If any right or power herein granted be exercised, Governors so exercising or voting for such exercise shall be held to the same standard of care as would a trustee acting for compensation.”
9. At relevant times, former Probate Code section 16040, subdivision (a), provided: “The trustee shall administer the trust with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument.”Probate Code section 16041 provides: “A trustee's standard of care and performance in administering the trust is not affected by whether or not the trustee receives any compensation.”
10. Corporations Code section 309, subdivision (a), provides: “A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”
11. “Despite contrary language in Corps.C. § 309(a) ․ and some cases, directors apparently will not be held liable for a negligent judgment (i.e., one a reasonably prudent person would not have made) so long as the process leading to the judgment meets business judgment rule requirements. In other words, courts will not ‘second-guess' the decisions of disinterested directors made with reasonable diligence in ascertaining the facts and believed to be in the corporation's best interests. (This is so even if the directors make a bad or ‘stupid’ decision.) [¶] Thus, the business judgment rule standard is one of gross negligence-i.e., failure to exercise even slight care.” (Friedman, Cal. Practice Guide: Corporations, supra, § 6:245.1 rev. # 1, 1995, italics in original.)
12. We also note that under the business judgment rule of Corporations Code section 7231, directors performing their duties in accord with the statute's subdivisions (a) and (b) have “no liability” for failing to discharge such obligations. (Id. at subd. (c).) However, Lamden does not seek to hold Association “liable” monetarily for its alleged breach of its responsibility to provide effective termite treatment. Instead, Lamden asks only for declaratory and injunctive relief directing that Association's performance of such responsibility be adequate.
KREMER, Presiding Justice.
WORK and McINTYRE, JJ., concur.