Lauriedale Associates, Ltd. v. Wilson

• Decision Date: 09 July 1992
• Docket Number: No. A051694,A051694
• Citation: 7 Cal.App.4th 1439,9 Cal.Rptr.2d 774
• Court: California Court of Appeals Court of Appeals
• Parties: LAURIEDALE ASSOCIATES, LTD., et al., Cross-complainant and Appellant, v. Scott WILSON, Cross-defendant and Respondent.

Page 774

9 Cal.Rptr.2d 774

7 Cal.App.4th 1439

LAURIEDALE ASSOCIATES, LTD., et al., Cross-complainant and Appellant, v. Scott WILSON, Cross-defendant and Respondent.

No. A051694.

Court of Appeal, First District, Division 2, California.

July 9, 1992.

Peter J. Thurston, Steven J. Johnson, Karen A. Morgan, Gibson, Dunn & Crutcher, San Jose, for cross-complainant/appellant.

Ann Rankin, Maria Giardina, Law Offices of Ann Rankin, Oakland, for cross-defendant/respondent.

James O. Devereaux, Berding & Weil, Alamo, amicus curiae for cross-defendant/respondent.

PETERSON, Associate Justice.

The primary issue in this case is straightforward. May the developers of a condominium complex, who have been sued for construction defects by a homeowners association, cross-complain against individual unit owners for equitable indemnity? Under the facts of this case, we conclude the answer is "no."

I. FACTUAL AND PROCEDURAL BACKGROUND

This is an appeal from a judgment entered after a demurrer was sustained without leave to amend. We, thus, recite the facts as set forth in the pleadings.

The Lauriedale Homeowners Association ("Association") is a California nonprofit corporation which was created to operate and manage the Lauriedale Condominiums, a 328-unit complex located in San Mateo. On a date which is not disclosed in the record, the Association filed a complaint against various persons and entities who had been involved in the development of the Lauriedale Condominiums. ¹ Throughout this opinion, we will refer to these persons and entities collectively as appellants. Essentially, the complaint alleged that appellants were responsible for defects in the commonly owned areas of the complex--such as roofs, walkways, and decks--under legal theories such as breach of contract, negligence, and misrepresentation. In addition, the complaint alleged that certain appellants, who previously had served as members of the Association's board of directors while the developer was in control of the complex, had failed to adequately assess or collect fees from the various unit owners. As a result, the Association alleged it lacked the funds necessary to make repairs at the complex. Both parties agree that these latter allegations attempt to assert a cause of action for breach of fiduciary duty premised upon Raven's Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 171 Cal.Rptr. 334, a prior decision from this court.

After being served with the complaint, appellants filed an answer and a cross-complaint. The cross-complaint generates the present appeal. In addition to naming various contractors and subcontractors who allegedly were responsible for damage at the complex, appellants named as cross-defendants over 700 persons who were then, or who in the past had been, owners of units in the Lauriedale Condominiums. We are concerned here only with the allegations of the cross-complaint against these unit owners; we note, however, that appellants also sought relief, equivalent to that sought in their cross-complaint, by affirmative defenses pled in their answer.

Although set forth in three causes of action, the allegations of the cross-complaint against the unit owners were based on only two legal theories. First, appellants denied that the common areas of the complex were damaged; but they alleged that, if such damage were proven, it was caused in whole or in part by individual unit owners who had misused the property. Thus, appellants sought total or partial indemnity from the unit owners under an equitable indemnity theory. Second, appellants denied that those persons who had previously served on the Association's board, while the developer was in control of the complex, had failed to collect adequate fees and assessments; but contended that, if such allegations were true, the unit owners, inter alia, would have underpaid the appropriate fees and assessments. Thus, appellants finally contended that, if they were held responsible for such underassessed amounts, they were entitled to indemnity therefor from the individual unit owners, to prevent the latter's unjust enrichment.

The causes of action asserted against the unit owners as a whole were challenged by demurrer of one of the unit owners, respondent Scott Wilson. Wilson essentially contended that the cause of action for equitable indemnity should be dismissed, because it violated public policy and created an unnecessary conflict between himself and the Association. He challenged, for failure to state a cause of action, appellants' contention of entitlement to indemnity to preclude the unit owners' unjust enrichment. The trial court agreed and wholly sustained Wilson's demurrer without leave to amend. After a judgment in favor of Wilson was entered, appellants filed the present appeal.

II. DISCUSSION

Appellants challenge the trial court's ruling sustaining Wilson's demurrer. They maintain they properly asserted causes of action for equitable indemnity and "Unjust Enrichment."

A. Equitable Indemnity

The legal principles governing equitable indemnity are well settled. "The purpose of [the doctrine] is to avoid the unfairness, under joint and several liability theory, of holding one defendant liable for the plaintiff's entire loss while allowing another responsible defendant to escape ' "scot free." ' " (GEM Developers v. Hallcraft Homes of San Diego, Inc. (1989) 213 Cal.App.3d 419, 426, 261 Cal.Rptr. 626.) As a general rule, a defendant "has a right to bring in other tortfeasors who are allegedly responsible for plaintiff's action through a cross-complaint ... for equitable indemnification." (Id. at p. 428, 261 Cal.Rptr. 626.)

However, because indemnification between joint tortfeasors is an equitable rule created to correct potential injustice, the doctrine is not available where it would operate against public policy. Thus, in Holland v. Thacher (1988) 199 Cal.App.3d 924, 929-935, 245 Cal.Rptr. 247, this court held that public policy concerns precluded an attorney sued for malpractice from cross-complaining for indemnity against a successor attorney who was retained to extricate the client from the problems created by the first attorney. In Munoz v. Davis (1983) 141 Cal.App.3d 420, 427, 190 Cal.Rptr. 400, the court refused to permit an attorney, sued for malpractice for allowing a statute of limitation to expire, to cross-complain against a driver who caused the plaintiff's injuries. The Munoz court noted there was "no equitable basis for shifting malpractice liability from the negligent lawyer to the tortfeasor whose actions caused the client's original injuries." (Ibid.)

Even more pertinent to the present case is Jaffe v. Huxley Architecture (1988) 200 Cal.App.3d 1188, 246 Cal.Rptr. 432. In Jaffe, the issue presented was whether the developers of a condominium complex, who had been sued by a homeowners association for construction defects, could cross-complain for equitable indemnity against individual members of the association's board of directors for acts and omissions which allegedly contributed to the original defects. The Jaffe court rejected the cross-complaint for two interrelated reasons. First, noting that the acts of the directors were, in legal effect, the acts of the association itself, the court concluded relief equivalent to that sought in the cross-complaint would be available to the developer through the various affirmative defenses it had asserted. Thus, fairness did not require that the developer be allowed to maintain a cross-complaint. Second, the court observed that a special relationship existed between the homeowners association and its directors, which for public policy reasons, should be preserved. Since the cross-complaint would effectively pit the board members against the association and jeopardize that relationship, the court concluded it would be unwise to allow the cross-complaint to proceed. (Id. at pp. 1192-1193, 246 Cal.Rptr. 432.)

The factors which persuaded the Jaffe court to reject a cross-complaint for equitable indemnity lead to a similar conclusion in this case. Here, as in Jaffe, the cross-complaint against Wilson is unnecessary because equivalent relief is available through affirmative defenses appellants have asserted. In response to the allegation that they were responsible for defects at the complex, appellants alleged by affirmative defense that any damage was caused by individual unit owners who misused the property. The Association has conceded that the legal effect of this affirmative defense is to hold it responsible for damage caused by present and past unit owners. Thus, to the extent appellants can prove their affirmative defense, the Association's recovery will be diminished under principles of comparative negligence. (See, generally, American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 598, 146 Cal.Rptr. 182, 578 P.2d 899.)

Second, allowing a cross-complaint for equitable indemnity in a case such as this could jeopardize the special relationship between the Association and its members, one characterized as fiduciary in nature. (Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d 642, 650-651, 191 Cal.Rptr. 209.) In carrying out their fiduciary duties, the directors of the Association may well have believed they had an obligation to pursue the present suit to protect the interests of the individual unit owners. If such a suit could result in personal liability on the part of the individual unit owners, the decision to bring suit would be much more difficult because the directors understandably would be hesitant to entangle unit owners in litigation. Since board members are also usually unit owners, the decision to initiate litigation, and thus subject oneself to personal liability, would be doubly difficult.

Furthermore, public policy considerations weigh heavily against allowing a cross-complaint such as this from going forward. The high cost of living in California,...