## Facts

- A developer acquired property for a 65-unit townhome project and formed a nonprofit homeowners’ association; the initial association directors were the developer and its employees.
- The developer conveyed the project’s common areas to the association; construction was substantially complete and unit sales began soon after.
- Until a later transition to homeowner control, the developer-controlled board performed minimal association functions.
- The governing declaration made the association responsible for maintaining and repairing common areas and authorized assessments and reserve funds beginning when the common areas were conveyed.
- Evidence showed substantial construction defects affecting common-area landscaping and the exterior walls of individual units.
- While controlled by the developer, the association did not establish operating funds or maintenance reserves despite foreseeable repair obligations.
- After homeowners obtained control, the association sued the developer and the former directors for construction-defect liability (common areas and unit exteriors) and for breach of fiduciary duty based on failure to determine operating costs and fund reserves.
- The trial court granted nonsuit on grounds including lack of association standing for individual-unit damage, lack of proof of out-of-pocket loss as to common areas, and no fiduciary breach.

## Issues

1. Whether the homeowners’ association had standing to sue for defects in common areas and, in a representative capacity, for defects affecting individual units.
2. Whether the developer could be held strictly liable for construction defects, and what measure of damages applied.
3. Whether developer-affiliated directors controlling the association owed and breached fiduciary duties in their management of association finances and reserves.
4. Whether, and to what extent, attorney’s fees were recoverable under the governing documents.

## Decision

- The court reversed the nonsuit and remanded for further proceedings.
- The association had standing to sue for common-area defects under Code of Civil Procedure § 374.
- The association also could sue in a representative capacity under Code of Civil Procedure § 382 for defects affecting individual units due to common questions and the impracticality of individual actions.
- The developer could be held strictly liable for applicable construction defects; the correct damages measure was reasonable cost of repair rather than amounts already spent.
- The developer-controlled directors could be held liable for breach of fiduciary duty for failing to exercise good-faith, competent management, including failure to establish adequate reserves amid conflicts of interest.
- Attorney’s fees were available for the fiduciary-duty claim under the governing documents’ fee provision, but the appellate fee award was nominal.

## Legal Principles

- A homeowners’ association may sue for damage to common areas it manages or holds for members under Code of Civil Procedure § 374.
- Even when statutory association standing is limited, representative actions under Code of Civil Procedure § 382 may permit the association to litigate unit-related claims when owners are numerous and common issues predominate.
- A residential developer of mass-produced housing may be subject to strict liability in tort for construction defects.
- For construction defects, damages generally are measured by the reasonable cost to repair or remedy the defects, not solely by prior out-of-pocket expenditures (Civ. Code § 3333).
- Directors of a nonprofit mutual benefit corporation, including developer-affiliated directors, owe duties of good faith and sound management and may not act in self-interest at the expense of the association and its members (then-Corp. Code § 5231).
- Governing document attorney-fee clauses may authorize fee recovery for fiduciary-duty litigation arising from association governance obligations.

## Conclusion

The court held that the homeowners’ association could proceed on common-area claims directly and on unit-related claims representatively, that the developer faced strict liability with repair-cost damages as the measure, and that developer-controlled directors could be liable for fiduciary breaches tied to conflicted, inadequate financial management and failure to fund reserves; the nonsuit was reversed and the matter returned for trial.


Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co., 114 Cal. App. 3d 783, 171 Cal. Rptr. 334 (Ct. App. 1981)