Epsten, APC

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 Judgment was entered in favor of the homeowners and the fines imposed against the homeowners were rescinded.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.

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.