The question of whether community associations have a fiduciary duty to their members to disclose the filing of litigation (for matters other than construction defect litigation) has been answered with a resounding "no" by a California Appellate Court. The opinion was handed down in the case of Ostayan v. Nordhoff Townhomes Homeowners Association, Inc.

This case is one of the multitude of cases which were spawned by the Northridge earthquake of January 17, 1994. The earthquake severely damaged the Nordhoff Townhomes development. Mr. Ostayan purchased an uninhabitable unit on June 11, 1997, from the U.S. Department of Housing and Urban Development (HUD) for $25,000. Mr. Ostayan then paid monthly assessments to the Association for the duration of his ownership of the townhouse. He never resided in the unit after he purchased it but sold it to Ismael and Maria Estrada on July 22, 1998, for $53,500.

During the time that Mr. Ostayan owned his unit, the association was engaged in a dispute with its insurance carrier regarding earthquake damage. The association negotiated with its insurance company for several years over earthquake related claims, and the dispute with the carrier was a frequent subject at meetings of the association's board of directors. The association mailed at least three (3) written notices to its members keeping the members informed of the ongoing dispute and even advising the members of the possibility that the association would ultimately have to take legal action.

Mr. Ostayan admitted receiving these three (3) communications from the association. The association ultimately filed a bad faith insurance lawsuit against its insurance company on April 3, 1998 and notified its members of the filing of the litigation by notice dated July 29, 1998. This written notice to the members was one week after Mr. Ostayan had sold his unit to the Estradas. In May 2000, the association's lawsuit against its insurance carrier was settled for $20 Million. The association later distributed the settlement funds to the then present members of the association. The Estradas received $180,000 from this settlement.

Mr. Ostayan subsequently filed his own lawsuit against the association, alleging claims for breach of fiduciary duty, negligence, and a constructive trust based on the association's failure to give him notice of the filing of the litigation. The association filed a motion for summary judgment on the ground that no duty existed to notify its members of the filing of the lawsuit against the insurance company. The trial court agreed and ruled that the association had no duty to notify Mr. Ostayan of the filing of the lawsuit against the insurance carrier and therefore granted summary judgment. Mr. Ostayan appealed the trial court's decision.

The essence of Mr. Ostayan's appeal was that the association had allegedly breached its "fiduciary duty" to him by failing to give him written notice that a lawsuit had been filed against the association's insurance company. The Appellate Court rejected Mr. Ostayan's position in a well reasoned opinion authored by Justice Mosk.

The Appellate Court's decision reviewed relevant provisions of California law and quoted from the California Supreme Court case of Frances T. v. Village Green Owners Association Justice Mosk then proceeded to note "the duties and powers of a homeowners association are controlled both by statute and by the association's governing documents." In examining the statutes (the Davis-Stirling Common Interest Development Act and the Non-Profit Mutual Benefit Corporation law), the Appellate Court acknowledged that these statutes establish comprehensive procedures and obligations concerning the operation of community associations, including the conduct of meetings, the expenditure of funds, communications with members, and the provision of financial and other information to association members. Significantly, the only statute requiring an association to give written notice of intended litigation to its members is in the context of a lawsuit for construction defects (Civil Code Section 1368.4). As Justice Mosk noted "The Legislature enacted extensive requirements for homeowners associations, including provisions for keeping members informed of their activities. Yet, the Legislature did not require that homeowners associations give to their members written notice of litigation they file (other than intended litigation against developers for construction defects)."

In a footnote, Justice Mosk also noted that the legislative history of Civil Code Section 1368.4 included the records of the Assembly Committee on Housing and Community Development which had addressed the question of whether proposed Civil Code Section 1368.4 should be expanded beyond construction defects to other types of litigation. The Legislature chose not to make such an expansion in the language of Civil Code Section 1368.4 leaving construction defect litigation as the only type of lawsuit which must formally be disclosed to association members.

The Appellate Court examined the Nordhoff Townhomes CC&Rs for possible notification requirements. The court found a number of association responsibilities, including providing maintenance and services to the development, preparing a budget, and securing legal services for the association. The specific notice requirements to members included providing a copy of the budget not less than sixty (60) days prior to the beginning of the fiscal year, notices of intent to cause repairs to any unit, and notices in advance of the initiation of any capital assessments. However, on the question of notice to members regarding litigation, the Appellate Court found "there is no provision in the CC&Rs requiring the association to notify its members of the filing of litigation."

Finding no statutory or CC&R requirement that the association notify its members of litigation filings (other than for construction defects), the Appellate Court concluded: "Filing the action against the insurance company was within the scope of the association's authority. The CC&Rs and statutes did not obligate the association to give notice to the members of the filing of the lawsuit. Whether and when to give any further notice was within the discretion of the association's board of directors. . . . The association cannot be expected to make disclosures so as toimpart information and relationship with every possible sale of a unit within the development. Were there such a requirement, the association's time could be consumed with the preparation of disclosure statements. Any such rule would also render redundant the procedure of annual reports, meetings, and the disclosures of budgets established by statute. If Ostayan had wanted information concerning the dispute with the association's insurer, he could have exercised his right to inspect the association's records or even queried a director. Then he would have been armed with all the information he now claims he needed before selling his unit. Having failed to gather this information through the methods provided by law and the CC&Rs, Ostayan cannot now shift the blame for failing to do so to a purported failure to fulfill a duty on the part of the association."

The Appellate Court could have ended its opinion with the conclusion that the association did not owe a fiduciary duty to its members to disclose the filing of the lawsuit. Interestingly, the court did not stop at that point but went on to conclude that even if the association had owed a duty of disclosure, the association satisfied that duty with its disclosures of its dispute with the insurer. The court noted that the general duty of disclosure extends only to "material facts." In this case, the material fact relevant to the owners was the existence of a dispute with the insurance company and not the actual filing of a lawsuit. Mr. Ostayan had admitted receiving the three (3) written communications from the association concerning the dispute with the insurance carrier. Justice Mosk therefore concluded that "the association's disclosure of the dispute with the insurer was sufficient." With that disclosure by the association, Mr. Ostayan had his own responsibility to investigate and become knowledgeable as to the precise nature, scope, and status of the dispute.

CONCLUSION

I find that there are many misconceptions regarding the proper functioning of community associations. Such misconceptions all too often extend from the general public to elected officials and even to our court system. It is refreshing to see a well written Appellate Court decision which, in my opinion, does an excellent job of recognizing the complexity involved in running a community association and keeping the roles of the association and the individual members in proper perspective.