Articles: Civil Litigation Archives - Page 2 of 2

Attorneys’ Fees Incurred in Prelitigation ADR: Grossman v. Park Fort Washington Association

Are attorney’s fees expended for Alternative Dispute Resolution (“ADR”) before litigation recoverable by the prevailing party in subsequent litigation under the Davis-Stirling Act?

In Grossman v. Park Fort Washington Association (2012) 212 Cal.App.4^th 1128, the California Court of Appeal, Fifth District, determined that attorneys’ fees and costs incurred during prelitigation ADR are recoverable if two conditions are met: (1) an action is brought after the prelitigation ADR proceeding to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.

Grossman involved a dispute between the Association and two homeowners who built a cabana and fireplace in their backyard without the Association’s approval. The homeowners requested a variance for the unapproved structures which the Association denied based on its interpretation that the governing documents prohibited the cabana and fireplace. The Association informed the owners that the cabana and fireplace had to be removed and imposed a fine of $10 per day until the structures were removed.

The Association and the homeowners thereafter agreed to mediate the dispute as required under former Civil Code §1369.520 (current Civil Code §5930). The case did not settle at mediation and the homeowners filed a lawsuit alleging that the Association improperly interpreted the governing documents in refusing to approve the cabana or grant a variance and in imposing fines against them.

The trial court disagreed with the Association’s interpretation of the governing documents and held in favor of the homeowners finding that the Association’s governing documents allowed the cabana and the fireplace as long as the fireplace was more than 10 feet from the property line. Judgment was entered in favor of the homeowners and the fines imposed against the homeowners were rescinded.

The homeowners filed a motion for an award of their attorneys’ fees and costs as the prevailing party in the action. In their application for fees and costs, in addition to seeking an award of their fees and costs incurred during the lawsuit, the homeowners also asked for an award of their fees and costs incurred in connection with the prelitigation mediation. The Association opposed the motion arguing that the attorneys’ fees and costs incurred in conjunction with the prelitigation mediation were not authorized under former Civil Code §1354(c) (current Civil Code §5975(c)).

The trial court again disagreed with the Association and awarded the homeowners $112,665 in fees and costs which included fees for the prelitigation mediation. The Association appealed and the court of appeal affirmed the trial court’s award of attorneys’ fees and costs, including those that were incurred in the prelitigation mediation.

The appellate court carefully analyzed former Civil Code §1354(c) and held fees incurred during prelitigation ADR may be included in an award of reasonable attorneys’ fees and costs if two conditions are met: (1) an action is brought after the prelitigation ADR to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.

The court of appeal reasoned that since former Civil Code §1369.580 (current Civil Code §5930) essentially makes ADR mandatory, for a court to deny reasonable attorneys’ fees incurred in pursuing prelitigation ADR would be contrary to the strong public policy of promoting the resolution of disputes through mediation and arbitration. The court of appeal determined that public policy is served in interpreting former Civil Code §1354(c) (current Civil Code §5975(c)) in a manner that awards reasonable attorneys’ fees and costs incurred in prelitigation ADR proceedings.

Electronic Discovery: Preserving Electronically Stored Information

Advances in technology have caused significant changes in the way civil discovery is conducted. Before the advent of the computer age, most documentation was easily identified as paper. Today, however, documentation is more likely to take the form of an email, text message, or computer file. Just as society’s method of communication has evolved, so has the law. California’s Electronic Discovery Act (Code of Civ. Pro. § 2016.010 et seq.) allows litigants to obtain electronically stored information (“ESI”) through the discovery process. As a result, when a party reasonably anticipates litigation (whether by filing a lawsuit or by being sued) there is a duty to preserve all ESI that may be discoverable.

What is “ESI”?

ESI should be defined as broadly as possible. ESI includes any information stored electronically, magnetically, digitally, or optically, such as email, voicemail, instant messages, text messages, sound or video recordings, word processed documents, spreadsheets, and other similar electronic media. Devices used to store, produce, and transmit ESI include computers, laptops, servers, cellular phones, handheld wireless devices, and the like. ESI also includes information about electronic data called “metadata.” Metadata is a hidden recorded history about an electronic file’s creation, modification, location, and size, which can be vital to a document’s significance in litigation.

When does the duty to preserve ESI arise?

The duty to preserve ESI arises when a party reasonably anticipates litigation. Since there is no bright-line rule as to when litigation can be “reasonably” anticipated, it is best to preserve ESI at the time a dispute arises, whether a lawsuit has been threatened or not.

Who does the duty to preserve ESI extend to?

In the case of a common interest development (homeowners associations, planned developments, condominium projects, community associations, maintenance associations, etc.), directors, officers, committee members, managers, agents, and employees all have a duty to preserve ESI once litigation is anticipated. Additionally, any vendor, consultant, or other third party who may have ESI related to the dispute has a duty to preserve that ESI. For example, if the dispute is over financial expenditures, the association should notify its accountant in writing to preserve ESI in his or her possession that is related to the dispute. The same applies to other vendors, depending on the nature of the dispute. If a director utilizes his work email account, computer, or cellular phone to conduct association business, his employer would also be subject to the duty to preserve ESI under its control. Extending this preservation duty to the director’s employer as a result of communications outside the scope of the director’s employment can have negative implications for the director as well as the association if the ESI is not properly preserved. Therefore, directors and committee members should be careful from where they send and receive email, and from what account. Directors should consider setting up a separate email account solely for association business. Associations may also consider creating their own domain name and supplying email addresses to its directors and committee members.

What do I need to do to preserve ESI?

Once litigation is anticipated, refrain from deleting or destroying any ESI that exists. Enact procedures to prevent future deletion or destruction of ESI and ensure that all automatic computer operations that delete ESI by age, capacity, or other criteria are turned off. Do not overwrite or erase any back-up media and do not use any defragmenting or compression programs, or metadata scrubbers. Note that when ESI is “deleted” it can still be recovered. Therefore, be careful to preserve all ESI at the appropriate time. The penalties for failing to preserve ESI can be significant, and the penalties for purposely deleting or destroying ESI can be even worse.

How do I properly dispose of ESI when litigation is not anticipated?

The association should implement a policy on ESI destruction and deletion for use during times when litigation is not anticipated. If the association has such a policy in place (for example, ESI will be purged after five years if no litigation is anticipated), it will be harder for a challenging party to claim that evidence has been improperly destroyed than if ESI is randomly deleted.

In a time where email and text messages are often a more common means of communication than speaking face-to-face, associations must be aware where the duty to preserve ESI arises and to whom it extends. Every time you push the send button, you are creating a potentially discoverable document. Protect your association from potential discovery challenges and penalties by enacting proper policies on the use and storage of electronic information.

Election Propaganda: Is It Protected Speech?

In the case of Silk v. Feldman (2012) 208 Cal.App.4th 547, the California Court of Appeal, Second District, was asked to determine whether letters sent to the membership of an Association by a board candidate constituted an exercise of free speech.

Sherrill Silk and Philip Feldman each owned units within the residential beachfront development known as Malibu Bay Club. Between 1996 and 2000, Silk served on the Association’s Board of Directors. Feldman became a board member in 2009.

During the time that Silk served on the Board, the Association was involved in a lawsuit that was brought by the son of the developer to establish ownership over 36 parking spaces located within the development. In 1999, the case went to trial and the trial court ruled that the developer’s son rightly owned the parking spaces along with another portion of the Association’s common area. Based on that ruling, the parties held a mediation and settled all remaining issues in the case. The settlement was negotiated by the attorneys for the respective parties, and was later approved by the boards of the respective parties. Following the settlement, a full disclosure of the settlement was made to the Association’s members at numerous meetings, and through the publication of letters to the members, including the community newsletter.

Shortly after the settlement was reached, the developer’s son began offering the parking spaces for sale to the general public and to the members of the Association for $25,000 per space. In December 2003, [four years after the parking spaces first went on the market] Silk purchased six parking spaces for $114,000 or $19,000 per space.

In 2009, Feldman, an attorney, wrote a letter to the members of the Association on his law office letterhead that encouraged members of the Association to vote for him in the upcoming Board election. Feldman’s letter further noted that Silk [who was also an attorney] was running for the Board and to promote himself over Silk, Feldman accused Silk of overseeing the prior lawsuit for her own personal gain.

Later that year, Feldman sent a second letter to the members which stated in part:

… Silk was on the Board and without the knowledge of the lawyers who settled the Knox matter, she and [the Board’s] president cut secret deals to purchase nine parking spaces for themselves with manufactured rights to use our beach along with each space. They never revealed what they did and never apologized. Successive ‘friendly’ boards kept their secret for a decade.

Silk sued Feldman for defamation. In response to the lawsuit, Feldman filed a special motion to dismiss the lawsuit as a Strategic Lawsuit Against Public Participation (“SLAPP”) claiming his statements were an act of free speech and were therefore protected. A “SLAPP” lawsuit is an unmeritorious action brought by one litigant for the illicit purpose of misusing the legal system to chill the opposing party’s exercise of the constitutional right of free speech or right of petition guaranteed by the Federal and California Constitutions. The trial court denied Feldman’s motion to dismiss the lawsuit and he appealed.

In refusing to dismiss the lawsuit, the Court of Appeal eloquently stated that “not all speech is free” and that “speech can be costly.” The court found that Silk was likely to prevail on her claim against Feldman because Feldman’s letter accused Silk of a serious breach of her fiduciary duty as a director which amounted to libel per se and that the accusations against her were false.

Moral of the story: One should make sure any accusations made in campaign materials are accurate as it could cost you more than a seat on the board.

Ameron Case Summary—Expanding the Definition of “Suit”

The Board of Directors is sometimes faced with a challenging question—does the association’s insurance company have a duty to defend the association or provide insurance coverage in a particular situation? The answer is often unclear, particularly when terms are left undefined in the association’s insurance policy. In the Ameron case, the California Supreme Court provides guidance on this issue. [Ameron International Corporation v. Insurance Company of the State of Pennsylvania, et al. (2010) 50 Cal. 4th 1370)]

Factual Background & Proceedings

Beginning in 1975, the United States Department of the Interior, Bureau of Reclamation (“Bureau”) contracted with Peter Kiewit Sons’ Company (“Kiewit”) for the fabrication and installation of concrete siphons used in the Bureau’s Central Arizona Project aqueduct. Kiewit then subcontracted manufacture of the siphons to Ameron International Corporation (“Ameron”), requiring it to defend and indemnify Kiewit in the event the siphons proved defective.

In 1990, the Bureau discovered defects in the siphons that required their replacement at a cost of approximately $116 million. In 1995, the Bureau’s contracting officer issued two final decisions finding Kiewit responsible for the siphons’ defects and seeking almost $40 million in damages from Kiewit and Ameron. Kiewit and Ameron challenged the contracting officer’s decision before the United States Department of Interior Board of Contract Appeals (“IBCA”). Ameron provided timely notice to its insurers.

The IBCA administrative law proceeding lasted 22 days and concluded when Ameron and Kiewit settled the Bureau’s claims against them for $10 million. Following the settlement, the majority of Ameron’s insurers generally failed or refused to pay for the cost of defending or indemnifying Ameron in the litigation before the IBCA.

In 2004, Ameron, for itself and as the assignee of Kiewit’s rights, filed a complaint against its insurance providers, alleging causes of action for breach of contract, breach of the covenant of good faith and fair dealing, declaratory relief, waiver and estoppel,and contribution. Ameron claimed that the insurance companies failed or refused to defend or settle the Bureau’s claims against it before the IBCA, failed to indemnify it for the IBCA settlement, and neglected to investigate the potential for coverage.

The trial court granted the demurrers of the insurance companies and dismissed Ameron’s complaint. The trial court held that the IBCA proceeding was not a “suit” that would trigger an insurance company’s duty to defend its insured or provide insurance coverage. The Court of Appeal reversed in part and held that the insured could recover under certain comprehensive general liability policies that defined a suit as a civil proceeding. The California Supreme Court granted review.

Supreme Court Observations & Conclusions

The Supreme Court observed that case law interpreting comprehensive general liability policies has defined a suit, absent a definition of the term in the policy, as a proceeding brought in a court of law by the filing of a complaint. Applying contract interpretation rules to determine the parties’ intent and to resolve ambiguity, the Supreme Court concluded that because the Contract Disputes Act describes an adjudicative proceeding as a “suit” and characterizes of the initial pleading as a “complaint,” the parties to an insurance contract would have reasonably intended that such a proceeding was a suit, thus trigging the defense and indemnity provisions in the insurance policies.

Community associations should be aware of the implications of the Ameron case. If a community association’s insurance policy does not define “suit,” there is a compelling argument that any administrative proceeding may trigger defense and indemnity obligations of the association’s insurer. This may result in the association’s insurance carrier having to provide legal counsel and/or pay for defense of the action.