Roslyn Lane v. Gallagher CA4/1 (2014) · DecisionDepot
Roslyn Lane v. Gallagher CA4/1
California Court of Appeal Apr 2, 2014 No. D062902Unpublished
Filed 4/2/14 Roslyn Lane v. Gallagher CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
ROSLYN LANE, LLC, D062902
Plaintiff and Appellant,
v. (Super. Ct. No. 37-2009-00086868- CU-OR-CTL) TOM GALLAGHER et al.,
Defendants and Respondents.
APPEAL from an order of the Superior Court of San Diego County, Judith F.
Hayes, Judge. Affirmed.
Wilson, Elser, Moskowitz, Edelman & Dicker, Gregory D. Hagen, Laura P. Kelly
and Robert Cooper for Plaintiff and Appellant.
McCormick & Mitchell and John P. McCormick, Nicole Barvie, Konrad M.
Rasmussen for Defendants and Respondents.
Roslyn Lane, LLC, (Roslyn Lane) which owns a building in the condominium
project known as Bedrock Development Company Condominiums, appeals the court's
order sustaining without leave to amend the demurrer of members of the Cave Street
Homeowners Association (Association) board of directors sued in their individual
capacities: Tom Gallagher, George Anne Marston, Chuck Buck, Herbert Mertel, Harris
Brotman and Ellen Brice (collectively the directors). Roslyn Lane also appeals the
court's decision to grant the motions of Association and the individual directors to strike
In November 2011, Roslyn Lane filed a first amended complaint alleging causes
of action for declaratory relief, "breach of declaration," breach of contract, accounting,
and breach of fiduciary duty against Association and the directors. Roslyn Lane alleged
that under the Covenants, Conditions and Restrictions (CC&R's) and the terms of a 2005
settlement agreement resulting from a prior lawsuit, Association was required to repair or
maintain Roslyn Lane's building. In its prayer for relief, Roslyn Lane sought a
declaration that it is entitled to have Association complete the maintenance and repairs to
its common areas affecting Roslyn Lane's building, general and special damages,
including lost rental income in excess of $25,000, exemplary and punitive damages,
attorney fees, an accounting, and other relief deemed proper.
Association and the individual directors separately moved to strike the first
amended complaint, arguing, "Because punitive damages are not available for breach of
contract, the apparent vehicle for the addition of punitive damages is a new cause of
action for breach of fiduciary duty which merely characterizes [Association's] conduct as
willful, oppressive and done with willful and deliberate disregard for the consequences to
[Roslyn Lane]. These broad and conclusory allegations are unsupported by any
specifically pled facts demonstrating conduct of [Association] justifying an award of
punitive damages against it." Further, each individual director demurred to the amended
complaint, contending that Roslyn Lane had not pleaded specific facts giving rise to their
individual liability.
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The court granted the motions to strike, ruling Roslyn Lane had not established
that each defendant was guilty of oppression, fraud or malice to support its claim for
punitive damages. It also sustained the demurrers with leave to amend, ruling the
complaint's allegations were uncertain, ambiguous or unintelligible, and Corporations
Code section 7231 protects directors from individual liability arising from their manner
of discharging their obligations. The court warned Roslyn Lane: "[I]f the complaint
remains defective, the court will not entertain further leave to amend."
Roslyn Lane's Second Amended Complaint
In July 2012, Roslyn Lane filed a second amended complaint alleging six causes
of action: declaratory relief, "breach of declaration," breach of contract, and accounting
against Association alone; Roslyn Lane alleged a cause of action for breach of fiduciary
duty against Association and individual directors; it also added a cause of action for
negligence against both Association and directors. Roslyn Lane alleged as to all causes
of action: "Under the terms and conditions of the CC&R's and the [2005] settlement
agreement [Association] was obligated to make certain repairs and allow certain
improvements to the property, including the following items: (a) repair of windows and
related damages; (b) repair of roof and related leaks; (c) approval of air conditioning; (d)
payment on electrical issues; (e) approval of building plans; and (f) point loading of
building corners." (Some capitalization omitted.)
Elaborating on each claim regarding needed repairs, Roslyn Lane alleged in the
second amended complaint that under the 2005 settlement agreement, Association was
obligated to repair areas of dry rot by replacing the damaged wood and the window glass
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to comply with the current building codes. Roslyn Lane continued: "[Association]
performed substandard repairs to the windows and despite repeated requests and demands
from the Plaintiff, negligently and/or intentionally and willfully refused to repair and/or
replace the glass with tempered glass and has intentionally and willfully refused to
correct these faulty repairs despite repeated requests therefor."
Regarding roof repair, Roslyn Lane contends: "The settlement agreement
provides that [Association] would repair the roof in accordance with the repair proposal
from Mario Zanelli and the modifications proposed by Mr. Marsh and that [Association]
would entertain comments from Mr. Marsh as to repair of the roof. [¶] Despite the
requirement of the settlement agreement and the general requirement for repair and
maintenance of the [Roslyn Lane] roof under the CC&R's, [Association] refused to
entertain the comments of Mr. Marsh and decided not to undertake the proper scope of
repairs. This is true in two particulars. First, [Association] refused to slope the roof in
such a way that the water would drain away from the Roslyn Lane side of the building.
As a consequence, the water flows over the front of the building and down the large
window walls, which are not flashed in such a way that they can keep out large amounts
of water. The result is that water continues to leak into the building at the large window
walls at the front of the building. Second, [Association] negligently and/or intentionally
and willfully refused to install a gutter to address the overflow water on the front of the
building, requiring, instead, that [Roslyn Lane] pay for such a gutter."
Regarding the air conditioning unit, the complaint alleged that under the
settlement agreement, "[Association] was to consider and not unreasonably withhold its
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approval in relation to proposals for air conditioning at locations other than the front of
the Roslyn Lane Building." Nevertheless, despite the fact experts proposed that the air
conditioning unit be installed along a pedestrian side of the Roslyn Lane building, that
was not done. Rather, "On or about April 3, 2007, Herbert Mertel, acting on behalf of
[Association], rejected the proposal that the air conditioning be placed anywhere other
than the front of the Roslyn Lane building. On behalf of [Association], and with the full
approval of the individual Board Members [sued as defendants] Mr. Mertel identified
four locations, all of which are located on the North (Roslyn Lane) side of the Roslyn
Lane building."
Roslyn Lane argues the defendants owed it money under the settlement
agreement: "[Association] was to pay [Roslyn Lane] the sum of $2,842.46. Instead of
paying that amount without reservation, however, [Association] tendered that amount,
along with a demand for an offset for electrical issues that were part of the settlement."
Further, "[Association] has charged [Roslyn Lane] for architectural charges allegedly
incurred to Salerno Livingston Associates, an architect [Association] asserts that [Roslyn
Lane] owes $1492.80 for services related to the design of the skylight installation at the
Roslyn Lane building. In point of fact, [Association] knows that those charges are
unjustified, and that [Roslyn Lane's] own consultant . . . both obtained and provided the
necessary information related to the skylight."
Roslyn Lane argued regarding "point loading": "In or about September of 2005
[Association] undertook construction on the Roslyn Lane roof. That renovation was
halted shortly after it commenced, but [Association] left large stacks of oriented strand
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board ('OSB') on the southwest and southeast corners of the building, and allowed water
to pond on the Roslyn Lane roof for long periods of time. Despite the fact that the OSB
and ponding was an open and obvious problem, and that the OSB and the water remained
on the roof for not weeks but months, [Association] took no action to resolve these
issues. [Roslyn Lane] eventually had to remind [Association] to remove the OSB.
[Roslyn Lane] also notified [Association] that the OSB was causing 'point loading' on the
corners of the building, resulting in structural deflection of these cantilevered corners."
Roslyn Lane alleged Association has refused to approve building plans Roslyn
Lane submitted that were approved by the City: "Mr. Gallagher, the President of
[Association], has admitted that the decision to withhold approval on Roslyn Lane
renovation plans has been done in an effort to exert leverage against [Roslyn Lane] so
that [Roslyn Lane] would drop its request on other issues, including the air conditioning."
Relying on the above-listed alleged failures by the directors, Roslyn Lane
contends they breached their fiduciary duties, "by placing their own interests before those
of [Association] and its membership, including [Roslyn Lane], and by withholding
information in a pattern of discriminatory behavior toward [Roslyn Lane], and in failing
to maintain adequate [Association] reserves with the result that necessary maintenance
and repairs to the Roslyn Lane Building have not been performed, in derogation of their
obligations under [Association] CC&R's and the [s]ettlement [a]greement."
In the second amended complaint, Roslyn Lane adds the following allegations
regarding Association's and the individual directors' purported breach of fiduciary duty:
(1) they failed to maintain reserves for the maintenance and repair of common area
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improvements; (2) they failed to obtain and distribute to Association members audited
financial statements, thus violating the CC&R's and certain statutes; (3) they
discriminated against Roslyn Lane by delaying needed repairs and maintenance in an
attempt to fix the reserve funding problem; (4) they failed to disclose the reasons for their
decisions and misled Roslyn Lane regarding the reasons for their failure to undertake the
maintenance and repairs; (5) they discriminatorily opted to repair a Cave Street building
where all the directors live instead of repairing the Roslyn Lane building; and (6) they
refused Roslyn Lane's reasonable requests for air conditioning placement that was
supported by their own experts and attorneys. Roslyn Lane alleged that the foregoing
claims also form the basis of the negligence cause of action.
Association and the individual directors moved to strike the second amended
complaint's claims for damages, arguing insufficient facts were alleged to support its
imposition. They also moved to strike the negligence cause of action because the court
had not granted Roslyn Lane leave to add it. Moreover, the individual directors
demurred, arguing Roslyn Lane did not plead specific facts to support causes of action
for breach of fiduciary duty or negligence.
Roslyn Lane opposed the motions to strike and the demurrer, contending that its
pleadings stated sufficient facts to support the breach of fiduciary duty cause of action.
Roslyn Lane reiterated its allegation that [Association] "improperly use[d] the separate
Roslyn Lane building as a source of funds, while refusing to perform repairs on it. In this
way, it could obtain air conditioning for its own building, repair the windows on its own
building and repair the roof on its own building, while leaving the [Roslyn Lane] building
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to decay." Roslyn Lane also reiterated its claim for punitive damages.1 Roslyn Lane did
not seek leave to further amend the complaint regarding the breach of fiduciary duty
cause of action, arguing, it had "adequately stated claims against each of the individually
named Board members and those claims support a request for punitive damages."
The trial court sustained the demurrer and granted the motions to strike, reasoning
that the second amended complaint failed to state sufficient facts to support the causes of
action for breach of fiduciary duty and negligence. It further found the breach of
1 Roslyn Lane argued in opposition that its punitive damages claim was valid: "(1) [T]he President of the Board agreed, as part of a settlement and in open court that replacement of the glass at the Roslyn Lane building would occur; (2) [Association] President and other Board members were aware that the failure to replace the glass was a violation of the Code and presented a life safety issue; (3) [Association] President, in conjunction with other Board members refused to undertake such repairs; (4) this was true even though he, and other Board members at the time, were apprised of these Code violations and the life safety issues that they presented; (5) [Association] and its Board were aware of this in part because of building inspectors and architectural experts during litigation conceded the point; (6) thus, the window repair issue may not just be one of negligence but rather one of intentionally refusing to undertake repairs; (7) Board members also admitted that waterproofing work performed around the windows was 'crappy' but refused to address the continuing water intrusion; (8) [Association] and its Board, acting in concert, concealed facts and affirmatively misrepresented the nature of their investigation in terms of [Roslyn Lane's] request for an air conditioner on the roof; (9) in concealing facts and misrepresenting them, [Association] and the Board acted in bad faith and contrary to the admissions made by their own consultants and attorneys; (10) other Board members, who joined the Board later, were aware of these facts because of correspondence between [Roslyn Lane] and the Board; (11) despite this notice, the Board continued to act intentionally, wrongfully, and in bad faith in relation to these issues; (12) [Association] and its Board wrongfully, intentionally and in bad faith withheld construction approvals; (13) [Association] Board President, Mr. Gallagher admitted in testimony that [Association] withheld approval on other issues in order to force the Plaintiff to give in on the air conditioning issues; (14) other Board members were aware of Mr. Gallagher's testimony, because correspondence was sent to them outlining these issues; and (15) once again, despite notice, the Board and [Association] intentionally, and in bad faith, refused to approve the building, causing severe economic duress to [Roslyn Lane]." 9
fiduciary duty cause of action defective under Corporations Code section 7231, Frances
T., supra, 42 Cal.3d 490 and Ritter & Ritter, Inc. Pension And Profit Plan et al. v. The
Churchill Condominium Assn. (2008) 166 Cal.App.4th 103. In sustaining the motion
without leave to amend, the court ruled, "[T]his is [Roslyn Lane's] third attempt to
properly plead a cause of action against the individual board members and [it] has failed
to demonstrate how the allegations could be reasonably amended to cure the defects
raised by these demurrers." Finally, the court struck Roslyn Lane's negligence cause of
action as being beyond the scope of its order to amend, stating: "In light of the Court's
ruling on demurrer, and without the [breach of fiduciary duty] and [negligence] causes of
action, there are no allegations against these moving defendants and therefore, [Roslyn
Lane] may not maintain claims for punitive damages. Further, [Roslyn Lane] was not
granted leave to amend to add a claim that exceeded the scope of the Court's ruling on
demurrer to the [first amended complaint]."2
DISCUSSION
I.
"In determining whether plaintiffs properly stated a claim for relief, our standard
of review is clear: ' "We treat the demurrer as admitting all material facts properly
pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We
2 We grant Roslyn Lane's motion for judicial notice of the jury verdict form of the breach of contract and declaratory relief causes of action that went to trial. The verdict form indicates that Roslyn Lane prevailed on its claims of breach of the CC&R's, and Association prevailed on its claims of breach of the CC&R's. The form does not specify the basis for each party's breach of contract claim.
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also consider matters which may be judicially noticed." [Citation.] Further, we give the
complaint a reasonable interpretation, reading it as a whole and its parts in their context.
[Citation.] When a demurrer is sustained, we determine whether the complaint states
facts sufficient to constitute a cause of action. [Citation.] And when it is sustained
without leave to amend, we decide whether there is a reasonable possibility that the
defect can be cured by amendment: if it can be, the trial court has abused its discretion
and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.]
The burden of proving such reasonable possibility is squarely on the plaintiff.' " (Zelig v.
County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) "If the complaint states a cause
of action under any theory, regardless of the title under which the factual basis for relief
is stated, that aspect of the complaint is good against a demurrer. '[W]e are not limited
to plaintiffs' theory of recovery . . . .' " (Quelimane Co. v. Stewart Title Guaranty Co.
(1998) 19 Cal.4th 26, 38.) We review de novo whether the complaint alleges facts
sufficient to state a cause of action. (Farm Raised Salmon Cases (2008) 42 Cal.4th 1077,
1089, fn. 10; CPF Agency Corp. v. Sevel's 24 Hour Towing Service (2005) 132
Cal.App.4th 1034, 1042.) " 'A judgment of dismissal after a demurrer has been sustained
without leave to amend will be affirmed if proper on any grounds stated in the demurrer,
whether or not the court acted on that ground.' " (Gomes v. Countrywide Home Loans,
Inc. (2011) 192 Cal.App.4th 1149, 1153.)
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II.
Breach of Fiduciary Duty Cause of Action
Roslyn Lane contends that under California's liberal pleading standards, it pleaded
sufficient facts to support a cause of action for breach of fiduciary duty against the
individual directors. The individual directors counter: (1) all of Roslyn Lane's claims
asserted in the original action were resolved by the settlement agreement and were
released under that agreement, and barred by the statute of limitations; (2) neither the
CC&R's nor any other law requires them to set aside adequate reserves and provide
financial statements; (3) The allegations in the second amended complaint are insufficient
to state causes of action as a matter of law because they are not specific enough to apprise
the directors of their alleged involvement in any asserted wrongdoing.
The elements of a breach of fiduciary duty cause of action are: (1) the existence of
a fiduciary duty; (2) a breach of that duty; and (3) resulting damage. (City of Atascadero
v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 483.)
Corporations Code, section 7231 broadly protects members of certain boards of
directors from liability for their decisions under certain circumstances: "A person who
performs the duties of a director . . . shall have no liability based upon any alleged failure
to discharge the person's obligations as a director, including, without limiting the
generality of the foregoing, any actions or omissions which exceed or defeat a public or
charitable purpose to which assets held by a corporation are dedicated." (Corp. Code,
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§ 7231, subd. (c).)3
The California Supreme Court has ruled that various aspects of association
decision making are protected from liability: "Where a duly constituted community
association board, upon reasonable investigation, in good faith and with regard for the
best interests of the community association and its members, exercises discretion within
the scope of its authority under relevant statutes, covenants and restrictions to select
among means for discharging an obligation to maintain and repair a development's
common areas, courts should defer to the board's authority and presumed expertise."
3 In its entirety, Corporations Code section 7231 states: "(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. [¶] (b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: [¶] (1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented; [¶] (2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence; or [¶] (3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee's designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted. [¶] (c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person's obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by a corporation are dedicated."
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(Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249,
265 (Lamden).)
"The business judgment rule 'sets up a presumption that directors' decisions are
based on sound business judgment. This presumption can be rebutted only by a factual
showing of fraud, bad faith or gross overreaching.' " (Ritter & Ritter, Inc. Pension and
Profit Plan v. Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 123.) "But a
plaintiff must allege sufficient facts to establish these exceptions. To do so, more is
needed than 'conclusory allegations of improper motives and conflict of interest. Neither
is it sufficient to generally allege the failure to conduct an active investigation, in the
absence of (1) allegations of facts which would reasonably call for such an investigation,
or (2) allegations of facts which would have been discovered by a reasonable
investigation and would have been material to the questioned exercise of business
judgment.' . . . 'Interference with the discretion of directors is not warranted in doubtful
Here, the court ruled the negligence cause of action was not within the scope of
the order granting leave to amend. We conclude the court did not err in making that
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finding. In any event, the facts Roslyn Lane alleges in favor of the negligence cause of
action are the same as those we have concluded are insufficient to plead a breach of
fiduciary duty cause of action. Those facts also are insufficient to support a negligence
cause of action.
The California Supreme Court held in Frances T.: "To maintain a tort claim
against a director in his or her personal capacity, a plaintiff must first show that the
director specifically authorized, directed or participated in the allegedly tortious conduct
[citation]; or that although they specifically knew or reasonably should have known that
some hazardous condition or activity under their control could injure plaintiff, they
negligently failed to take or order appropriate action to avoid the harm. [Citations]. The
plaintiff must also allege and prove that an ordinarily prudent person, knowing what the
director knew at that time, would not have acted similarly under the circumstances."
(Frances T., supra, 42 Cal.3d at pp. 508-509.) The Supreme Court clarifies that directors
are not personally liable for all harm to a third party; rather, the principle of
reasonableness applies: "We are mindful that directors sometimes must make difficult
cost-benefit choices without the benefit of complete or personally verifiable information.
For this reason, even if their conduct leads directly to the tortious injury of a third party,
directors are not personally liable in tort unless their action, including any claimed
reliance on expert advice, was clearly unreasonable under the circumstances known to
them at that time. This defense of reasonable reliance is necessary to avoid holding a
director personally liable when he or she reasonably follows expert advice or reasonably
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delegates a decision to a subordinate or subcommittee in a better position to act." (Id. at
p. 509.)
Roslyn Lane has not alleged facts showing the individual directors' actions were
clearly unreasonable under the circumstances. In light of Roslyn Lane's admission in the
second amended complaint that the individual directors engaged in prioritizing of certain
repairs over Roslyn Lane's, that decision suggests some reasonable basis for the
individual directors' actions.
IV.
No Showing of Grounds for Amendment
An appellant has the burden of showing "in what manner [it] can amend [its]
complaint and how that amendment will change the legal effect of [its] pleading."
(Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) "[L]eave to amend should not be
granted where . . . amendment would be futile." (Vaillette v. Fireman's Fund Ins. Co.
(1993) 18 Cal.App.4th 680, 685.)
Neither in the trial court nor on appeal has Roslyn Lane sought further leave to
amend its complaint; rather, on appeal Roslyn Lane claims it had pleaded sufficient facts,
and rebuts the individual directors' contrary arguments: "The Directors include an
argument that [Roslyn Lane] failed to show it could cure the defects in its [second
amended complaint] through amendment and, thus, failed to show that the trial court
abused its discretion in denying leave to amend . . . . However, the Directors' argument
misses the point . . . . [Roslyn Lane] argues that it pled sufficient facts to constitute
causes of action in its [first amended complaint]."
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We note that after Roslyn Lane pleaded the breach of fiduciary duty in two
pleadings, the court expressly warned it that the demurrer to that cause of action would be
sustained absent allegations of specific facts. Nonetheless, in the second amended
pleading, Roslyn Lane failed to remedy the defects the court had identified. Likewise, in
light of our above analysis, Roslyn Lane has failed to meet its burden of showing it could
amend its complaint to state a valid cause of action for negligence. Accordingly, we do
not grant leave to amend.
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DISPOSITION
The order is affirmed.
O'ROURKE, J.
WE CONCUR:
NARES, Acting P. J.
AARON, J.
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AI Brief
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Holding. The court affirmed the order sustaining the demurrer without leave to amend and granting the motion to strike, holding that the plaintiff failed to allege sufficient facts to overcome the business judgment rule and the protections afforded to directors under Corporations Code section 7231.
Issues
Whether the plaintiff pleaded sufficient facts to state a cause of action for breach of fiduciary duty against individual directors.
Whether the trial court erred in striking the negligence cause of action as exceeding the scope of the court's prior order granting leave to amend.
Disposition. Affirmed.
Quotations verified verbatim against the opinion
“The breach of fiduciary duty cause of action fails because the individual directors had no fiduciary duty to exercise their discretion one way or the other so long as their conduct conformed to the standard set out in Corporations Code section 7231.”
“The business judgment rule 'sets up a presumption that directors' decisions are based on sound business judgment. This presumption can be rebutted only by a factual showing of fraud, bad faith or gross overreaching.'”
“[T]his is [Roslyn Lane's] third attempt to properly plead a cause of action against the individual board members and [it] has failed to demonstrate how the allegations could be reasonably amended to cure the defects raised by these demurrers.”