Judge: Mark H. Epstein, Case: 23SMCV00104, Date: 2023-02-23 Tentative Ruling

Case Number: 23SMCV00104    Hearing Date: February 23, 2023    Dept: R

This is a motion for a preliminary injunction to bar the HOA from entering into contracts to retrofit and from imposing retrofit assessments pending trial.  The issue arises from a decision by the HOA’s Board of Directors (the Board) to retrofit the building to make it earthquake safe.  While the retrofit would comply with a Santa Monica ordinance, the Board does not say that the ordinance is the motivating force here.  (And the ordinance itself does not require compliance until 2037.)  Rather, in 2018 the Board engaged a consultant, Holmes Structures, to look at the building and make determinations and recommendations as to what is needed to make the building safe(r) in the event of a major earthquake.  After receiving the report, the Board states that it concluded that the only responsible thing to do is to follow the recommendations with all deliberate speed to improve the building’s safety in order to protect the lives and property of the owners and residents in the event of a major earthquake.  To do so, the Board put the project out to bid and is poised to begin to enter into binding contracts with successful bidder Swinerton, which estimated a cost of about $15 million.  However, there was significant pushback by the homeowners.  In December 2021, two matters were put to an HOA vote.  One appears to be a special assessment to pay for the project and the second was a change in the CC&Rs to allow the HOA to take out a loan that would allow homeowners to pay for the assessment over a 20 year period through installments.  Both were rejected by the HOA.  (Oddly, while both parties characterize the vote, neither party actually seems to have included the language of the proposal(s) upon which the HOA voted.)  Even so, the Board states that during the same election, the HOA elected a number of people to the Board who openly supported the assessments.  In April 2022, after that vote, the Board passed two emergency special assessments.  One was due on February 1, 2023 for $5 million (in total) and the other is due on August 1, 2023 for $10 million (in total).  After attempting to negotiate with the Board, plaintiffs, members of the HOA, brought this action.  They now seek an injunction to declare the assessments unlawful and to bar the Board from going forward with any binding contracts until and unless the HOA approves such action. 

Plaintiffs do not assert that these improvements will never need to be made.  Rather, they claim that assessments this large cannot be made without a vote approving them by the HOA, and therefore nothing should happen pending that vote.  According to plaintiffs, there is plenty of time to get the work done.  They also question whether the assessment is necessary to do the work, claiming that a current increase in assessments will ultimately generate sufficient revenue to pay for the work without any additional special assessments.  The Board disagrees, stating that it has the authority to take the actions that it took and that it would be impractical and irresponsible to delay the work while the other assessments slowly flow in (if those assessments will ever be enough).

Before discussing what this motion is about, the court takes a moment to discuss what the motion (and the case) is not about.  This case is not about the wisdom of the retrofit.  There is one thing of which this court is certain: it is not the court’s job to second-guess the Board or the HOA as to whether a retrofit is needed or not.  As the HOA correctly argues, the business judgment rule applies.  (Lamden v. La jolla Shores Clubdominium Homeowners Ass’n.  (1999) 21 Cal.4th 249.)  Thus, as long as the Board’s decision is not arbitrary in the sense that they breached the duty of care (similar to the duty a corporate board of directors has when making a corporate decision), the court will not second-guess the merits.  And that is a very low bar.  It requires only that the Board rely on some reasonable source when weighing its decision.  The court’s job is not to consider what it would have done in the Board’s shoes.  What this case is about is who (since it is not the court) gets to make the decision: the Board or the HOA as a whole.  That question is a legal one (predominantly) and goes not to the decision’s merits, but rather to the process of decision-making.

The court also disregards the evidentiary objections.  They are not helpful and it appears that both sides have viewed the objections more as a law school exercise than an attempt to think through the objections that make sense and must be made.  The parties are reminded of our Supreme Court’s statement in Reid v. Google (2010) 50 Cal.4th 512, 532-533 that only meritorious objections should be raised, and then only to evidence that makes a different.  “Blunderbuss objections to virtually every item of evidence” is unhelpful and improper.  That seems to be what happened here.  That does not mean that the court will rely on inadmissible evidence; it is only to say that objections like these do not move the ball forward and the court questions whether they were made in good faith.  The court also warns the parties that declarations should not be argumentative.  They are evidence, not “briefadavits.”

Turning, then, to the merits, “[a] superior court must evaluate two interrelated factors when ruling on a request for a preliminary injunction: (1) the likelihood that the plaintiff will prevail on the merits at trial and (2) the interim harm that the plaintiff would be likely to sustain if the injunction were denied as compared to the harm the defendant would be likely to suffer if the preliminary injunction were issued.  Weighing these factors lies within the broad discretion of the superior court.”  (Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729, 749, citations omitted.)  And one major goal of a preliminary injunction is to preserve the status quo ante, and that, too, weighs into the balance.

This question is governed by the Civil Code.  Section 5600 states that the HOA (through its board) shall make regular assessments to perform its obligations, but not impose an assessment for more than is needed to defray the costs for which the assessment or levy is made.  Section 5605, however, places a limit on such assessments.  Subdivision (b) states that the “board may not impose a regular assessment that is more than 20% greater than the regular assessment for the association’s preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year without the approval of a majority of a quorum of members.”  (Emphasis added.)  The parties agree that the assessments in question exceed this threshold.  However, section 5610 provides an exception to 5605’s limitation.  It provides that section 5605 “does not limit assessment increases necessary for emergency situations.”  An “emergency situation” is defined for pertinent purposes as an “extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered.”

The parties argue over whether this is an “emergency situation.”  Plaintiffs contend that this is not an “emergency situation”; defendant contends that it is.  Relying on the statute’s definition of the term, the Board contends that its retained experts have found that there are significant weaknesses in the structure that could cause death or great injury to those in the building in the event of a major earthquake.  The Board further argues that the question is not whether there will be a major earthquake, but when it will be.  Thus, the Board concludes, it has discovered a “threat to personal safety on the property,” and it thus has the authority to impose the emergency assessment.  Plaintiffs argue that the very nature of the word “emergency” imposes some temporal dimension.  They contend that the theory is that the Board can only take this sort of action when there is simply not time to hold a general election of the HOA in order to protect lives and safety.  They acknowledge that an earthquake can occur at any time, but they assert that “any time” could mean today or 20 years from now; there is no way to tell.

The court is at least tentatively persuaded by plaintiffs’ argument.  The structure of the statute suggests that major and extraordinarily large assessments should be approved by the owners directly, rather than indirectly through their elected representatives.  The court agrees that the point of the word “emergency” means that time is such that a vote simply cannot be taken in time without undue risk to safety.  The court has considered the Board’s argument contrasting section 5610 with section 4360, which expressly requires an imminent threat for the Board to impose a change in the CC&Rs without a vote.  However, the court is not sure that the two statutes are in pari materia, or, if they are, what effect that has.  Section 5610 discusses a financial decision, and one that is not temporary, but rather permanent.  It represents an exception to an exception to the rule.  The general rule is that assessments are determined by the Board.  The exception is that very large assessments must be put to an HOA-wide vote.  And the exception to the exception is that in an “emergency situation,” the Board can act without a vote.  Section 4360 is different.  It deals with a temporary exception to the general rule.  The general rule is that amendments to the CC&Rs require HOA approval.  The exception is where the change is needed to address an imminent threat.  And the emergency change lasts only 120 days absent readoption or vote by the HOA.  The Board’s reading suggests that the Legislature decided that some decisions are simply too important to be put to a general vote even if there is no impediment to taking such a vote.  In other words, the Board’s logic is that there are reasons for representative government and one such reason is that we do not trust the electorate to make intelligent decisions in some very important areas.  The Board’s position is not without some theoretical support in the academic sense; the California Constitution, for example, puts limits on the powers of initiative entrusting certain decisions to the elected Legislature alone.  But be that as it may, it is just not possible for the court to understand the word “emergency” without some urgency and temporal component, suggesting that there is simply not time to undertake an HOA vote.  The court has no doubt but that the Legislature has the power to define terms it uses in a statute, including stripping a word’s ordinary and commonly understood meaning away.  But before the Legislature will be presumed to use a word in a way contrary to how the word is used in the English language, the court would need to see stronger evidence than is in the record right now.  Along these lines, the court notes that the Board is not claiming some structural problem that will cause harm at any moment even absent an earthquake.  In other words, this is not like the Florida situation (to which the Board frequently adverts) where there is a flaw in the building such that if not fixed, it will collapse on its own at any time.  So far as the court can tell from this record, absent an earthquake the building is safe.

The court is well aware that no one can predict the next big earthquake.  That is true as to both timing and effect.  That is, the next earthquake could happen very soon or many years from now; no one can say.  And the next big earthquake could occur in a number of locations based on a number of fault lines.  Where it hits will determine the effect it has on a particular location.  It could hit offshore, in which case the coastal areas might be at risk, but more from water than shaking.  It could hit in the valley, it could hit in the heart of Los Angeles.  There are different kinds of quakes with different kinds of effects.  Some kinds of earthquakes will cause more harm to particular sorts of structures than will others.  The court does not recite this to second-guess whether a retrofit is needed; it recites this to state that, at least as a matter of preliminary injunction, it does not seem that the uncertainty inherent in earthquake prediction makes this a temporal emergency sufficient to meet the statutory requirement.

As to the balance of equities, the court believes it is hard to say.  For purposes of the preliminary injunction, the injunction will only do harm if the major earthquake hits during a window of time when the work would have been done absent the preliminary injunction but was not complete because of the delay caused by the preliminary injunction.  If the earthquake is outside that window, there is no harm at all.  In other words, if the earthquake hits tomorrow, the preliminary injunction does not matter.  The work would not be complete whether or not the preliminary injunction issues.  If the earthquake hits 10 years from now, the preliminary injunction will not matter; it will have expired long before and the work will either be complete because a permanent injunction did not issue or it might not be complete because permanent injunction did issue and the HOA refused to approve the assessment.  Outside the window, then, the harm is zero.  On the other hand, if the earthquake hits during that window, and if it actually causes the catastrophic damage that the Board fears, the harm could be beyond measure.  Thus, so far as the court can tell, the actual likelihood of any harm caused by the preliminary injunction is very, very small, although if the stars mis-align the harm could be impossible to calculate in terms of dollars.  The harm to plaintiffs is primarily economic.  If the preliminary injunction does not issue, the assessments will be imposed.  On the other hand, if a permanent injunction issues, the assessments will be reversed.  Any money collected will need to be returned and any debts or liens imposed by non-payment would be reversed or lifted.  Absent the preliminary injunction, however, the assessments will take effect and the Board could start to take action to collect the assessments even from homeowners who cannot afford them.  But that said, at least given the timing discussed below, the court does not really see evidence that any HOA member will be actually forced out before the trial.  If the Board enters into a contract with a contractor that has a termination penalty because there is no preliminary injunction, that penalty will be incurred and will need to be paid if a permanent injunction issues.  That is a monetary harm, but the question remains who will pay that money if the permanent injunction issues?  Requiring the HOA to pay it means that the very people seeking to avoid the cost will be saddled with the cost.  On the other hand, it is far from clear to the court that it can require the individual Board members to be liable personally for the debt.  One supposes that this might be dealt with by way of a bond to avoid a preliminary injunction, but as a practical matter, the HOA will have to pay for the bond and the bonding company will require the HOA to pay the full cost.  The bond really does not solve anything.

The Board also suggests that if the preliminary injunction issues, the costs will go up by over $3 million.  The court disagrees.  The court will not second-guess the attorneys’ fee estimate of $100,000—counsel knows best what it is likely to charge, although, for the reasons discussed below the court believes the estimate might be high.  But the costs of delay are overstated.  This is not an evidence-heavy case.  If, as appears to be the situation, the retrofit is all about earthquakes and not about some other kind of flaw, there is very little factual development needed.  The court does not need or want more than a modicum of evidence on the question whether the retrofit is a good idea or a bad one.  All the court really needs is enough to satisfy the business judgment rule, and the expert’s report—obtained at a cost of$750,000—is likely enough without more.  In fact, even if the report is flawed, it would not matter.  It is beyond the court’s limited business judgment review to delve into the merits of the report.  The Board breaches no duty by erroneously relying on a report that appears competent on its face even if it turns out that the report was not properly done.  And it would almost certainly be a fool’s errand for plaintiffs to attempt to establish that the Board’s decision was so outside the realm of reason as to be arbitrary.  So if there is no real question as to the wisdom of the assessment (for purposes of the business judgment rule analysis) or the scope of work, then the only real question is the one discussed above: is this an “emergency situation” as that term is used in section 5160?  The court might well hear evidence or receive briefing on the legislative history of that clause, and there could be evidence regarding how long it would take to organize an HOA vote if one is needed.  But it is hard to see how that will require an army of lawyers or years of litigation.  And for that reason the court disregards the evidence as to the cost increases assuming that a trial will not take place for years.  Further, the case is equitable, not legal.  Plaintiffs do not seek money damages; they seek an injunction.  That is the hallmark of equity, and means (conclusively in the court’s view) that this is a bench trial, not a jury trial.

A word on discovery and its scope.  Plaintiffs suggest that there is a lot of it to do.  The court disagrees.  As set forth above, the business judgment rule applies here.  The court will not second-guess the wisdom of the Board’s decision if the Board was entitled to make that decision.  That means that if the procedure is right (meaning that no HOA vote is required), the Board’s decision will only be reversed by the court if it is arbitrary and the court will decide discovery motions using that rubric.  To be sure, if all the Board has is a conclusory one-page letter with no back up or detail, it would cause the court to scratch its head and the arbitrariness doctrine may apply.  So the court is prepared to agree with plaintiffs that discovery ought to be allowed to the extent of the information available to the Board at the time its decision was made (meaning production of the full report).  What the court will not allow is for this to devolve into a battle of the experts.  The law is clear that the Board may rely on experts and consultants in making its decisions unless the reliance is wholly unreasonable.  Given that rule, plaintiffs’ needed discovery is actually rather narrow.  That is not to say that no depositions will be allowed or any discovery permitted.  It is to say that plaintiffs may be mis-perceiving the very narrow scope of this court’s review of the merits and the court will look carefully at any attempt to impose the discovery suggested in plaintiffs’ reply papers.

If the court is right, the court can try the case this calendar year—and likely not during the holiday season.  The delay will not be a few years, it will be some number of months.  The court frankly doubts that the contractors are likely to go away during that time or that construction costs will skyrocket during that period.  And an expedited trial greatly reduces the risk of harm should the preliminary injunction issue because it greatly narrows the window discussed above.

Finally, the court notes that preserving the status quo favors plaintiffs.  At the moment, there are no contracts and no assessment has been collected.  (Plaintiffs argue that the HOA is essentially in contempt because it has not rescinded the assessment.  The court disagrees.  The Board stated that the assessment is still in effect but that no effort to enforce it will be made while the injunction remains in effect.  That is good enough.  If the injunction becomes permanent, any payments collected will be refunded and any payments not collected will never be due and no adverse action against any homeowner will be taken.  If the injunction is ultimately denied, then the HOA will be able to enforce the assessment, but presumably no penalties will be assessed for any homeowner’s decision not to pay the assessment while the injunction was in force.  That is consistent with the TRO and is not contempt, and, frankly, the question is not a close one.)

Thus, the court is inclined to GRANT the motion for a preliminary injunction, but set the trial in the near future. (To a large extent, the decision to grant the preliminary injunction is closely linked with the thought that there can be a speedy trial.)  The Board might want to consider mooting the whole case by holding a clean HOA vote on the matter on the theory that (if the Board can make its case to the HOA as to wisdom) the HOA will approve the measure and the assessment can then be imposed without question (or at least without any question now before the court).  If the measure is voted down, then this case would remain live, of course, but it would give both sides some important practical information.  The court is not ordering such an election—that might be a part of an order should a permanent injunction issue, but it will not be part of a preliminary injunction.  Because the harm cannot reasonably be calculated and will almost certainly not be known while the preliminary injunction is in force, the amount of the bond will be relatively nominal.  If fees are recoverable, they will be recovered through the judgment.  If not, they will need to be incurred either way.  And, to be clear, the preliminary injunction will not bar the Board from entering into contracts so long as those contracts do not impose a penalty for termination.

The court will discuss with the parties a trial schedule.