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

• Decision Date: 20 January 1981
• Citation: 171 Cal.Rptr. 334,114 Cal.App.3d 783
• Court: California Court of Appeals Court of Appeals
• Parties: RAVEN'S COVE TOWNHOMES, INC. et al., Plaintiff and Appellant, v. KNUPPE DEVELOPMENT COMPANY, INC. et al., Defendants and Respondents. Civ. 45398.

Page 334

171 Cal.Rptr. 334

114 Cal.App.3d 783

RAVEN'S COVE TOWNHOMES, INC. et al., Plaintiff and Appellant, v. KNUPPE DEVELOPMENT COMPANY, INC. et al., Defendants and Respondents.

Civ. 45398.

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

Jan. 20, 1981.

Rehearing Denied Feb. 19, 1981.

Hearing Denied April 16, 1981.

James E. Cooke, Julia P. Wald, Cooke & Mack, San Francisco, for plaintiff and appellant.

Watson & Joiner, Joseph D. Joiner, Sedgwick, Detert, Moran & Arnold, Mark W. Hudson, San Francisco, for defendants and respondents.

TAYLOR, Presiding Justice.

This is an appeal by Raven's Cove Townhomes, Inc., a homeowners' association (Association), from a judgment of nonsuit in its action against Knuppe Development Company, Inc., the project developer (Developer) for strict liability and breach of warranty as to defects in common area landscaping, as well as in the exterior walls of individual units, and against the Developer and the Developer's employees as former directors in control of the Association, for breach of fiduciary duty by failing to properly determine operating costs and fund a maintenance reserve account. The major questions presented are: 1) the Association's standing to sue as representing a common interest subdivision (as defined by Bus. & Prof. Code, § 11000.1) pursuant to Code of Civil Procedure section 374, or in a representative capacity, pursuant to Code of Civil Procedure section 382; 2) the strict liability of the Developer and appropriate measure of damages pursuant to Kriegler v. Eichler Homes, Inc., 269 Cal.App.2d 224, 74 Cal.Rptr. 749; 3) the fiduciary liability of the Developer and its employees as former directors in control of the Association; and 4) attorney fees. For the reasons set forth below, we have concluded that the judgment must be reversed.

Viewing the record in favor of the Association, as we must on appeal from the nonsuit pursuant to Code of Civil Procedure section 581c (cf. Smith v. Roach, 53 Cal.App.3d 893, 897-898, 126 Cal.Rptr. 29), the following pertinent facts appear.

The Association is a nonprofit corporation whose members are the owners of 65 townhomes in the Raven's Cove development in Alameda, California. In November 1972, defendants, James and Barbara Knuppe, the sole owners of the Knuppe Development Company, ¹ conveyed the common areas and facilities in fee simple to the Association. The Developer had been in the residential home building business for over 18 years and had built about 3,000 units, including several townhome developments, before Raven's Cove. The Developer acquired the undeveloped Raven's Cove site in April 1972. The site had been the place of fill activity for many years. The Developer added more fill in the fall of 1972. The overlying compoted fill is not generally characteristic of the native sandy soil.

The Association was incorporated by the Developer in 1972. In August 1973, the Developer recorded its grant deed of the common areas to the Association. By October 1973, construction had been substantially completed and sales commenced. Until May of 1974, when it was turned over to the homeowners, the Association was under the control of the Knuppes, who could not recall any functions that they performed, other than the signing of the Association's bylaws as officers.

The Association holds title to the common areas, including nearly two acres of lawns and shrubbery and landscaped areas. The Association also is responsible for maintenance and repair of the roofs and siding of the individual units, the common areas, and has the responsibility of assessing and collecting dues from the homeowners to establish: 1) an operating fund to pay current costs of upkeep, payment of water bills, and the cost of landscape maintenance personnel; 2) a replacement reserve fund for major costs, such as painting exterior surfaces of the individual units, replacement of roofs and major private street repairs. Replacement reserves have to be accumulated because the Association: 1) cannot assess its members a sufficient amount in a short period of time to pay for the work and materials required for major repairs and improvements; 2) cannot borrow funds for this purpose as the result of the nature of its assets. No reserve or operating funds were ever established or turned over to the Association.

There were serious defects in the landscaping and siding of Raven's Cove in 1974. As to the landscaping, expert testimony established that the problems with the soil, drainage and irrigation systems of the common areas which resulted in yellow lawns, dead olive trees and unhealthy plants, were the result of the Developer's failure to properly prepare the soil. The soil conditions were not appropriate for the desired landscaping; the soil contained a lot of clay, base rock and in most areas was not more than three or four inches deep before hitting hardpan or base rock. In some areas, there was no soil. The Associations' expert, a landscape architect, testified that the soil type was not proper for the growth of plant materials, as the roots of plants could not penetrate the soil. In addition, the progressive land fill resulted in problems of compaction. The differences in soil textures created layering and improper subsurface drainage for the plants. He opined that although 12 inches was the reasonably satisfactory depth for lawn planting material, the problem could be solved by removing the present shallow top soil layer over the hardpan and replacing it with an 8 inch depth of planting material.

Further, the drainage and irrigation system installed at Raven's Cove varied from the plants and specifications of the Developer's landscape architect. The wrong sprinkler heads were installed so that there was inadequate watering in some areas and too much irrigation in others. In a number of areas, the sprinklers watered the buildings, sidewalks and streets. The irrigation system delivered the same quantity of water to shady, sunny and windswept areas and to all kinds of plants without adjustment for the differing requirements of trees, lawns and shrubbery. The Association's experts estimated that the costs of correcting the landscaping defects would range from about $219,000 to $240,000; this estimate included redesigning the irrigation system, replacing the olive trees and correcting the lawns.

As to the siding, a painting contractor reaffirmed the testimony of homeowners and property managers as to the conditions of the siding and trim of the individual units. The unpainted siding was decomposing from water and rusting, blacking and mildew, which in some areas was caused or exacerbated by improper sprinkler placement. Apart from mildew, an unpainted wood surface will eventually break down. The use of ungalvanized nails in the trim caused deterioration in the paint and premature chalking in 1974, shortly after the turnover of the Association, as well as seeping rust from the nails. Galvanized nails are customarily used on all exterior surfaces in well constructed projects. He estimated that it would cost between $8,000 and $9,000 to paint the siding, and $17,640 (at $256 for each of the 65 units) to repaint the trim on the individual units.

The instant action was commenced by the Association in 1976. The amended complaint alleged eight causes of action for declaratory relief, strict liability and for breach of warranty as to the landscaping of the common areas and the defects in the individual units, and breach of fiduciary duties by the initial Association directors for failing to establish an adequate reserve fund.

In granting the Developer's motion for nonsuit, the trial court specified three grounds: as to the causes of action involving the individual units on the ground that the Association lacked standing; involving the common areas on the ground that there had been no proof of out-of-pocket loss; and against the individual directors on grounds of no breach of fiduciary or other duties.

The first major contention on appeal pertains to the standing of the Association to sue for the landscaping defects in the common areas and the defects in the exteriors of the individual units. As a general rule, a homeowners' association has no standing to sue unless it has an ownership interest in the property by the association or an express statutory grant to bring the suit (Friendly Village Community Assn., Inc. v. Silva & Hill Constr. Co., 31 Cal.App.3d 220, 107 Cal.Rptr. 123). The Developer erroneously asserts that Friendly Village states the law applicable here. The Developer's argument overlooks the significant distinguishing factor between Raven's Cove and the condominium type of development involved in Friendly Village, namely, here the Association owns the common areas. Thus, there can be no question that here, at least as to the common areas, the Association has standing pursuant to Code of Civil Procedure section 374, ² which was enacted in 1976 in response to Friendly Village to provide that owners' associations in projects of condominiums, community apartments and undivided interest subdivisions have standing to sue for damages to commonly owned areas.

The Association maintains that Raven's Cove is an undivided interest subdivision project, as defined by Business and Professions Code section 11000.1, set forth, so far as pertinent, below. ³ Business and Professions Code section 11000.1 adds to the definition of "subdivided lands" and "subdivision," for purposes of regulation of offers or sales of such subdivision, the creation of five or more undivided interests in improved or unimproved land. As indicated above, at Raven's Cove, the interests are specifically divided between the Association, which is the sole owner of the common area ⁴ and facilities, and its homeowner members, who are the sole owners of their individual residential units. Thus, there are no undivided interests to bring the Association within the purview of...