Finley v. Superior Court, E024743.

• Decision Date: 23 May 2000
• Docket Number: No. E024843.,No. E024743.,E024743.,E024843.
• Citation: 96 Cal.Rptr.2d 128,80 Cal.App.4th 1152
• Court: California Court of Appeals Court of Appeals
• Parties: Warren T. FINLEY, as Trustee, etc., et al., Petitioners, v. SUPERIOR COURT for the County of Orange, Respondent; Third Laguna Hills Mutual et al., Real Parties in Interest. Warren T. Finley, as Trustee, etc., et al., Plaintiffs and Appellants, v. Third Laguna Hills Mutual et al., Defendants and Respondents.

96 Cal.Rptr.2d 128

80 Cal.App.4th 1152

Warren T. FINLEY, as Trustee, etc., et al., Petitioners, v. SUPERIOR COURT for the County of Orange, Respondent;

Third Laguna Hills Mutual et al., Real Parties in Interest.

Warren T. Finley, as Trustee, etc., et al., Plaintiffs and Appellants, v. Third Laguna Hills Mutual et al., Defendants and Respondents.

No. E024743.

No. E024843.

Court of Appeal, Fourth District, Division 2.

May 23, 2000.

Certified for Partial Publication.^*

As Modified on Denial of Rehearing June 22, 2000.

Review Denied September 13, 2000.

[96 Cal.Rptr.2d 130]

[80 Cal.App.4th 1154]

Payne & Fears, Daniel M. Livingston, Irvine, Alan G. Ross; Albert, Weiland & Golden, Costa Mesa, and Marcus M. Kaufman, for Plaintiffs, Appellants, and Petitioners.

No appearance for Respondent Superior Court.

Hart, King & Coldren, William R. Hart, and Robert J. Mulvihill, Santa Ana, for Defendants, Respondents, and Real Parties in Interest Third Laguna Hills Mutual, United Laguna Hills Mutual, Golden Rain Foundation of Laguna Hills, Earl Donaldson, Jim Etter, Tom Jorde, Robert Morton, Jan Nelson, Walter Penn, Marvin Taves, Cynthia Chyba, Robert Miller, Burns Nugent, Dick Osterlind, Bert Postill, Eleanore Schwartz, Ann Snider, Thomas Blaylock, Bettye Carlsten, Kenneth Dooley, Richard Fuchs, Phyllis Fish, Eloise Kight, Thomas E. McCauley, Leo Minkin, Richard Newsome, Robert Ring, Leroy Wolever, Juel Anderson, Irving Goldberg, Bert Hack, Matthew Magidson, Rhea Saylors, Bert Black, Seymour Coblens, Harry Curtis and Robert Payne.

Cassidy, Warner, Lane & Winstead, B. Kent Warner and David C. Olson, Santa Ana, for Defendant, Respondent, and Real Party in Interest Charles Hellman.

[80 Cal.App.4th 1155]

OPINION

RICHLI, J.

Several related homeowners associations used homeowner-paid assessments to make contributions to a political action committee to support a local Orange County ballot measure. Plaintiffs, who are members of the homeowners associations, challenge these contributions as ultra vires, illegal, and in violation of their constitutional rights to free speech and association.

Plaintiffs have filed both a writ petition and an appeal. In the writ proceeding, we issued an alternative writ and consolidated the proceeding with the appeal. In the appeal, plaintiffs contend they were entitled to the issuance of a preliminary injunction. In the writ petition, plaintiffs contend they were entitled to entry of summary judgment in their favor; alternatively, they contend the trial court erred by bifurcating the trial of defendants'"special litigation committee" affirmative defense. We find no error. Thus, we will deny a writ and we will affirm.

I FACTUAL BACKGROUND

United Laguna Hills Mutual (United), Third Laguna Hills Mutual (Third), and another association not a party to this action are the homeowners associations for different portions of Leisure World, a senior citizens community in Laguna Hills.

Golden Rain Foundation of Laguna Hills (Golden Rain) functions as a sort of master homeowners association. Each of the homeowners associations at Leisure World is a voting "corporation member" of Golden Rain; each of their respective homeowner members is a nonvoting "member" of Golden Rain. (We will refer to United, Third, and Golden Rain collectively as the Associations.) The Associations are nonprofit mutual benefit corporations.

Leisure World is near the El Toro Marine Corps Air Station. (The Thomas Guide: Orange County (1998 ed.) pp. 861, 891.) Proposals that this closed military base be converted into a commercial airport have generated considerable local controversy. Measure S, an initiative which would have impeded or prevented the airport conversion, qualified for the March 1996 Orange County ballot. Taxpayers for Responsible Planning—Yes on Measure S (Taxpayers) is a political action committee which — needless to say — supported Measure S.

Between January 1995 and January 1996, the Associations contributed a total of $542,361 to Taxpayers. This money came from assessments they had collected from their homeowner members. Taxpayers used the money to support Measure S.

After this action was filed, each of the Associations formed its own special litigation committee. Each committee was made up of three members of the board of directors who had not become members until after this action had been filed. The committees retained separate legal counsel; in person or through counsel, they interviewed witnesses and reviewed all pleadings, motions, and discovery in this action. The special litigation committees all concluded that the prosecution of this action was not in the best interests of the Associations.

II PROCEDURAL BACKGROUND

The plaintiffs in this action are Warren T. Finley, as trustee of the James and Sylvia Henderson 1977 Trust, Donald H. Rez, as trustee of the Rez Family Trust and Donald Firestone. Each of them allegedly is a member of one or more of the Associations.

The defendants are the Associations and certain members of their respective boards of directors who allegedly authorized the contributions (collectively, the Directors).¹

Plaintiffs' complaint, as subsequently amended, was asserted derivatively, on behalf of the Associations. It alleged five causes of action against the Directors: (1) for recovery of the contributions, on the grounds that they (a) violated the Davis-Stirling Common Interest Development Act (Civ.Code, § 1350 et seq.), (b) violated the Associations' governing documents, (c) breached the Directors' fiduciary duties, (d) constituted a waste of corporate assets, and (e) were ultra vires; (2) for conversion; (3) for recovery of the contributions, on the grounds that they violated the constitutional rights of dissenting members of the Associations; (4) for injunctive relief; and (5) for violation of civil rights (42 U.S.C. § 1983).²

Defendants answered and asserted affirmative defenses, including the business judgment rule and that the action was not in the best interest of the Associations. On December 30, 1998, plaintiffs filed motions for summary judgment; in the alternative, they sought summary adjudication on each cause of action and/or on defendants' business judgment rule defenses. Also on December 30, 1998, plaintiffs filed a motion for a preliminary injunction. Plaintiffs submitted the same evidence in support of, and defendants submitted the same evidence in opposition to, both motions.

On or about December 30, 1998, defendants filed a motion to bifurcate and try first their affirmative defense that the action could not be maintained derivatively because disinterested special litigation committees had determined that it was not in the best interest of the Associations.

On March 12, 1999, after hearing argument, the trial court denied plaintiffs' motions for summary judgment and a preliminary injunction. It granted defendants' motion to bifurcate.

On April 7, 1999, plaintiffs appealed from the order denying their motion for a preliminary injunction.

On April 14, 1999, plaintiffs filed a petition for writ of mandate, challenging the order denying their motions for summary judgment and the order granting defendants' motion to bifurcate.

III-IV^**

V THE BUSINESS JUDGMENT RULE DEFENSE

Plaintiffs contend they were entitled to summary adjudication on defendants' business judgment rule defense.

Under the business judgment rule, a director cannot be held liable for actions taken in good faith which he or she believes, based on a reasonable investigation, to be in the best interests of the corporation. (Corp.Code, §§ 309 [General Corporation Law], 7231 [Nonprofit Mutual Benefit Corporation Law]; Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal. App.4th 365, 378-379, 20 Cal.Rptr.2d 87; Gaillard v. Natomas Co. (1989) 208 Cal. App.3d 1250,1263, 256 Cal.Rptr. 702.)

Plaintiffs argue the business judgment rule does not apply to actions which are ultra vires or illegal. In an unpublished portion of this opinion however, we held that, on this record, the contributions were neither ultra vires nor illegal. Accordingly, even assuming, for purposes of argument, plaintiffs have correctly stated the law, they were not entitled to summary adjudication on this defense.

VI THE SPECIAL LITIGATION COMMITTEE DEFENSE

Plaintiffs contend the trial court erred by bifurcating defendants' special litigation committee defense. They also contend — albeit tersely — it erred by failing to grant summary adjudication on this defense.

Plaintiffs' primary argument is that a special litigation committee defense has not been recognized, and should not be recognized, in California. Plaintiffs waived this contention by failing to raise it below. As an alternative ground, however, and because this issue seems likely to loom large on remand, we hold that the special litigation committee defense is legally valid in California.⁶

A number of other states (or federal courts applying the law of other states) have recognized a special litigation committee defense. This defense arises out of the interplay between the business judgment rule and the requirement in a stockholder's derivative action that the plaintiff must have made a demand on the board of directors to have the corporation pursue the action. (See Corp.Code, § 800, subd. (b)(2).) Thus, it has been held that, once a duly appointed committee of disinterested directors reasonably determines that it is not in the best interests of the corporation to pursue the claims asserted in the derivative action, that decision is protected by the business judgment rule. The trial court must determine, as a matter of fact, whether the committee members were disinterested and whether they conducted an adequate investigation. If it answers yes to both questions, however, it must dismiss the derivative action. {Roberts v. Alabama Power Company (Ala.1981) 404 So.2d 629, 631-636; Hirsch v. Jones Intercable, Inc. (Colo.1999) 984 P.2d 629, 636-638; De Moya v. Fernandez ...