AVIATION NOISE LAW
Finley et al. v. Superior Court (Third Laguna Hills Mutual et al.)
Cite as: 80 Cal.App.4th 1152, 96 Cal.Rptr.2d 128


CALIFORNIA COURT OF APPEAL, FOURTH DISTRICT, DIVISION 2

WARREN T. FINLEY, as Trustee, etc., et al., Petitioners
v.
SUPERIOR COURT FOR THE COUNTY OF ORANGE, Respondent;
THIRD LAGUNA HILLS MUTUAL et al., Real Parties in Interest.

WARREN T. FINLEY, as Trustee, etc., et al., Plaintiffs and Appellants
v.
THIRD LAGUNA HILLS MUTUAL et al., Defendants and Respondents.

E024743, E024843

Filed May 23, 2000, amended June 22, 2000

(Appeal from Superior Court of Orange County, No. 760598, C. Robert Jameson, Judge)

CERTIFIED FOR PARTIAL PUBLICATION
PURSUANT TO CALIFORNIA RULES OF COURT, RULES 976(b) AND 976.1, THIS OPINION IS
CERTIFIED FOR PUBLICATION WITH THE EXCEPTION OF PARTS III, IV, AND VII.


DISPOSITION:

The order denying plaintiffs' motion for a preliminary injunction is affirmed. Plaintiffs' petition for a writ of mandate is denied. Defendants shall recover costs against plaintiffs. (Cal. Rules of Court, rules 26, 56.4(a).)

COUNSEL:

Payne & Fears, Daniel M. Livingston, Alan G. Ross; Albert, Weiland & Golden and Marcus M. Kaufman for Plaintiffs, Appellants, and Petitioners.

Hart, King & Coldren, William R. Hart, and Robert J. Mulvihill for Defendants, Respondents, and Real Parties in Interest Third Laguna Hills Mutual, United Laguna Hills Mutual, Golden Rain Foundation of Laguna Hills, Earl Donaldson, Jim Etter, Tom Jorde, Robert Morton, Jan Nelson, Walter Penn, Marvin Taves, Cynthia Chyba, Robert Miller, Burns Nugent, Dick Osterlind, Bert Postill, Eleanore Schwartz, Ann Snider, Thomas Blaylock, Bettye Carlsten, Kenneth Dooley, Richard Fuchs, Phyllis Fish, Eloise Kight, Thomas E. McCauley, Leo Minkin, Richard Newsome, Robert Ring, Leroy Wolever, Juel Anderson, Irving Goldberg, Bert Hack, Matthew Magidson, Rhea Saylors, Bert Black, Seymour Coblens, Harry Curtis, and Robert Payne.

Cassidy, Warner, Lane & Winstead, B. Kent Warner and David C. Olson for Defendant, Respondent, and Real Party in Interest Charles Hellman.


OPINION:

Several related homeowners associations used homeowner-paid assessments to make contributions to a political action committee to support a local Orange County ballot measure. Plaintiffs, who are members of the homeowners associations, challenge these contributions as ultra vires, illegal, and in violation of their constitutional rights to free speech and association.

Plaintiffs have filed both a writ petition and an appeal. In the writ proceeding, we issued an alternative writ and consolidated the proceeding with the appeal. In the appeal, plaintiffs contend they were entitled to the issuance of a preliminary injunction. In the writ petition, plaintiffs contend they were entitled to entry of summary judgment in their favor; alternatively, they contend the trial court erred by bifurcating the trial of defendants' "special litigation committee" affirmative defense. We find no error. Thus, we will deny a writ and we will affirm.


I
FACTUAL BACKGROUND

United Laguna Hills Mutual (United), Third Laguna Hills Mutual (Third), and another association not a party to this action are the homeowners associations for different portions of Leisure World, a senior citizens community in Laguna Hills.

Golden Rain Foundation of Laguna Hills (Golden Rain) functions as a sort of master homeowners association. Each of the homeowners associations at Leisure World is a voting "corporation member" of Golden Rain; each of their respective homeowner members is a nonvoting "member" of Golden Rain. (We will refer to United, Third, and Golden Rain collectively as the "Associations.") The Associations are nonprofit mutual benefit corporations.

Leisure World is near the El Toro Marine Corps Air Station. (The Thomas Guide: Orange County (1998 ed.) pp. 861, 891.) Proposals that this closed military base be converted into a commercial airport have generated considerable local controversy. Measure S, an initiative which would have impeded or prevented the airport conversion, qualified for the March 1996 Orange County ballot. "Taxpayers for Responsible Planning - Yes on Measure S" (Taxpayers) is a political action committee which -- needless to say -- supported Measure S.

Between January 1995 and January 1996, the Associations contributed a total of $542,361 to Taxpayers. This money came from assessments they had collected from their homeowner members. Taxpayers used the money to support Measure S.

After this action was filed, each of the Associations formed its own special litigation committee. Each committee was made up of three members of the board of directors who had not become members until after this action had been filed. The committees retained separate legal counsel; in person or through counsel, they interviewed witnesses and reviewed all pleadings, motions, and discovery in this action. The special litigation committees all concluded that the prosecution of this action was not in the best interests of the Associations.


II
PROCEDURAL BACKGROUND

The plaintiffs in this action are Warren T. Finley, Donald H. Rez, and Donald Firestone. Each of them allegedly is a member of one or more of the Associations.

The defendants are the Associations and certain members of their respective boards of directors who allegedly authorized the contributions (collectively, the Directors). [FN 1]

[FN 1] Taxpayers and its treasurer, Jerard Warner, were also named as defendants, but they, and the causes of action against them, are not involved in this appeal.
Plaintiffs' complaint, as subsequently amended, was asserted derivatively, on behalf of the Associations. It alleged five causes of action against the Directors: (1) for recovery of the contributions, on the grounds that they (a) violated the Davis-Stirling Common Interest Development Act (Civ. Code, s. 1350 et seq.), (b) violated the Associations' governing documents, (c) breached the Directors' fiduciary duties, (d) constituted a waste of corporate assets, and (e) were ultra vires; (2) for conversion; (3) for recovery of the contributions, on the grounds that they violated the constitutional rights of dissenting members of the Associations; (4) for injunctive relief; and (5) for violation of civil rights (42 U.S.C. 1983). [FN 2]
[FN 2] The fifth cause of action was essentially identical to the third cause of action, for violation of constitutional rights, with the addition of a claim for attorney's fees under 42 United States Code section 1988.
Defendants answered and asserted affirmative defenses, including the business judgment rule and that the action was not in the best interest of the Associations.

On December 30, 1998, plaintiffs filed motions for summary judgment; in the alternative, they sought summary adjudication on each cause of action and/or on defendants' business judgment rule defenses. Also on December 30, 1998, plaintiffs filed a motion for a preliminary injunction. Plaintiffs submitted the same evidence in support of, and defendants submitted the same evidence in opposition to, both motions.

On or about December 30, 1998, defendants filed a motion to bifurcate and try first their affirmative defense that the action could not be maintained derivatively because disinterested special litigation committees had determined that it was not in the best interest of the Associations.

On March 12, 1999, after hearing argument, the trial court denied plaintiffs' motions for summary judgment and a preliminary injunction. It granted defendants' motion to bifurcate.

On April 7, 1999, plaintiffs appealed from the order denying their motion for a preliminary injunction.

On April 14, 1999, plaintiffs filed a petition for writ of mandate, challenging the order denying their motions for summary judgment and the order granting defendants' motion to bifurcate.


III
FAILURE TO SPECIFY FACTUAL ISSUES AND EVIDENCE

[NOT CERTIFIED FOR PUBLICATION]


IV
PLAINTIFFS' FIRST CAUSE OF ACTION:
ULTRA VIRES AND/OR ILLEGAL CONTRIBUTIONS

[NOT CERTIFIED FOR PUBLICATION -- DO NOT CITE]


Plaintiffs contend the contributions were ultra vires under the Associations' governing documents, and illegal under the Davis-Stirling Common Interest Development Act (Civ. Code, s. 1350 et seq.).


A. Additional Factual Background.
1. Golden Rain Foundation of Laguna Hills.
a. Articles of Incorporation.

Golden Rain was incorporated in 1962. Its articles of incorporation provide:

"The purposes for which this corporation is formed are:
"(a) To engage primarily and specifically in sponsoring and forming California corporations whose joint purpose will be to develop a community or communities for senior citizens; and to provide services and community facilities to the occupants of the community or communities and to others.
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(c) To engage in any business or activity now or hereafter permitted under the General Non-Profit Corporation Law of the State of California.
"For the purposes above specified, this corporation shall have the following powers:
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(c) To sell, assign, convey, exchange, lease, mortgage, encumber, transfer upon trust, or otherwise dispose of all property, real and personal.
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . ."
"(g) To make donations for the public welfare or for charitable, scientific, or educational purposes."


b.Bylaws.

Golden Rain's bylaws provide:

"The purposes of this corporation are:
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(b) to engage in any business or activity now or hereafter permitted by the Articles of Incorporation of this Corporation, these Bylaws, or by the Nonprofit Mutual Benefit Law . . . .
"For the purposes above specified, this Corporation has the powers:
"(a) to take such action as is permitted by its Articles of Incorporation of this Corporation or these Bylaws;
"(b) to do any other act now or hereafter permitted under the Nonprofit Mutual Benefit Law or other applicable law which is not in conflict with the Articles of Incorporation or these Bylaws . . . ."


2. United Laguna Hills Mutual.
a. Articles of Incorporation.

United was incorporated in 1975. Its articles of incorporation provide:

"The specific and primary purpose for which the corporation is formed is . . . to provide housing on a mutual nonprofit basis . . . .
"The general purposes for which the corporation is formed, and the business and objects to be carried on and promoted by it, are as follows:
"(a) To construct, operate, maintain and improve, and to buy, own, sell, convey, assign, mortgage or lease any real property and any personal property necessary or incident to the provision of such housing;
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(d) To enter into any kind of activity, and to perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the nonprofit purposes of the corporation . . . ."


b. Bylaws.

United's bylaws provide:

"The purposes of the Corporation are:
"(a) To provide housing at Rossmoor Leisure World, Laguna Hills, California to its Members on a mutual nonprofit basis . . . .
"(b) To engage in any business or activity now or hereafter permitted under the California Nonprofit Mutual Benefit Law.
"For the purposes above specified, this Corporation has the following powers:
"(a) To take such action as is permitted by its Articles of Incorporation and these Bylaws; and
"(b) To do any other act now or hereafter permitted under the Nonprofit Mutual Benefit Law which is not in conflict with the Articles of Incorporation or these Bylaws."


2. Third Laguna Hills Mutual.
a. Articles of Incorporation.

Third was incorporated in 1970. Its articles of incorporation provide:

"The specific and primary purposes for which this corporation is formed are . . . to manage, operate and maintain condominium housing projects at Rossmoor Leisure World, Laguna Hills, California.
"In order to accomplish the foregoing purposes and for no other purpose or purposes, this corporation shall have the power to:
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(e) Convey, exchange, lease, mortgage, encumber, transfer upon trust, or otherwise dispose of all property, real or personal;
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(g) Enter into any contract or take any action necessary to, in connection with or incidental to the accomplishment of the purposes of this corporation."


b. Bylaws.

Third's bylaws provide:

"The purposes of the Corporation are:
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(b) To manage, operate and maintain condominium housing . . . as set forth in the Articles of Incorporation . . . .
"For the purposes above specified, this Corporation has the following powers:
"(a) To take such action as is permitted by its Articles of Incorporation [and] these Bylaws . . . ; and
"(b) To do any other act now or hereafter permitted under the Articles of Incorporation, these Bylaws, or the Restrictions which is not in conflict with the Nonprofit Mutual Benefit Law [or] the Common Interest Development Law . . . ."


B. The Associations' Governing Documents.

"When disputes arise between the homeowners and the homeowners association, the courts will look to the governing instruments for guidance in determining whether the association has acted within its authority. [Citation.]." (Major v. Miraverde Homeowners Assn. (1992) 7 Cal.App.4th 618, 627.) "Where the association exceeds its scope of authority, any rule or decision resulting from such an ultra vires act is invalid . . . ." (Id., at p. 628.)


1. The Associations' Powers.

In 1978, the Nonprofit Mutual Benefit Corporation Law (Corp. Code, s. 7110 et seq.) was enacted, effective January 1, 1980. (Stats. 1978, ch. 567, s. 6.) Among its provisions is Corporations Code section 7140 (section 7140), which provides:

"Subject to any limitations contained in the articles or bylaws and to compliance with other provisions of this division and any other applicable laws, a corporation, in carrying out its activities, shall have all of the powers of a natural person, including, without limitation, the power to:
" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"(h) Make donations for the public welfare or for community funds, hospital, charitable, educational, scientific, civic, religious or similar purposes." (Italics added.)
Under the transitional provisions of the Nonprofit Mutual Benefit Corporation Law: ". . . Section 7140 . . . applies to subject corporations . . . ; but any statement in the articles of such corporations prior to an amendment thereof pursuant to Section 9913, relating to the powers of the corporation shall not be construed as a limitation unless it is expressly stated as such." (Corp. Code, s. 9914, italics added.) [FN 1]
[FN 1] "Subject corporation" is defined as including a nonprofit mutual benefit corporation already in existence on January 1, 1980. (Corp. Code, s. 9910, subd. (f); see also Corp. Code, ss. 5003, subds. (a)(3), (a)(4), (a)(5), 9912, subd. (a)(1).)
Each of the Associations was incorporated before the enactment of the Nonprofit Mutual Benefit Corporation Law. There is no evidence that their articles of incorporation have been amended at any time since January 1, 1980. Accordingly, section 7140 applies to them. Admittedly, section 7140 is expressly made subject to any limitations in the corporation's articles. No statement in the articles, however, may be construed as a limitation unless it is expressly stated to be such. We find no such express statement.

The Associations' bylaws in no way limit their powers. To the contrary, the bylaws broadly permit them to do any act not prohibited by their articles or by applicable law.

We conclude the Associations have all the powers of a natural person. This includes the power to make a contribution for ■the public welfare.■ Moreover, a natural person can make a contribution even if it is not for the public welfare. Thus, the Associations had the power to make the challenged contributions.


2. The Associations' Purposes.

The Associations' purposes were variously defined as providing housing, providing services to the occupants of a senior citizens community, and managing, operating, and maintaining condominium housing projects. Plaintiffs argue the contributions were not incidental to these purposes.

In Marsili v. Pacific Gas & Elec. Co. (1975) 51 Cal.App.3d 313, the defendant corporation contributed $10,000 to oppose a local ballot initiative which would have required voter approval for construction of any building more than 72 feet high. (Id., at pp. 316-317.) The plaintiff stockholders contended the contribution was ultra vires. (Id., at p. 317.)

The appellate court began by noting that, under the Corporations Code as it then stood, a corporation had the power to do any act incidental to its purposes. (Marsili v. Pacific Gas & Elec. Co., supra, 51 Cal.App.3d at pp. 322-323.) It therefore defined the issue as "whether a contribution toward the defeat of a local ballot proposition can ever be said to be convenient or expedient to the achievement of legitimate corporate purposes." (Id., at p. 323.) Members of the corporation■s board had determined that the initiative would adversely affect the corporation by raising taxes and by interfering with its present and future building plans. (Id., at p. 325.) The court concluded: "Their judgment was not arbitrary or capricious but was based upon pertinent business considerations that were of direct and immediate concern to the corporation." (Ibid.) It therefore held that " . . . where, as here, the board of directors reasonably concludes that the adoption of a ballot proposition would have a direct, adverse effect upon the business of the corporation, the board of directors has abundant statutory and charter authority to oppose it." (Id., at p. 324.)

Here, the Associations made the contributions because they believed Measure S was "necessary to preserve the current lifestyle of the Leisure World . . . community." Leisure World would be in the airport's flight pattern. Thus, it would be "heavily impacted" by the airport conversion, which "would have profound adverse effects on the quality of life and property values at Leisure World, through air and noise pollution, vibration and traffic congestion . . . ." A carefully designed professional survey revealed that 91.3 percent of Leisure World residents opposed the airport conversion; only 3.3 percent supported it. Although this survey was conducted after this action had already been filed, it demonstrated that defendants shared the members' perception of the Associations' best interests. Defendants concluded that, if Measure S failed to pass and the airport conversion proceeded, there would be a direct, adverse effect on Housing at Leisure World. This conclusion was not arbitrary or capricious. On this record, the contributions furthered the Associations' purposes.

Plaintiffs rely on Spitser v. Kentwood Home Guardians (1972) 24 Cal.App.3d 215. There, a homeowners association sued the City of Los Angeles, seeking an injunction to abate airport noise. It also imposed an assessment on the homeowners to finance the suit. (Id., at p. 217.) Under the applicable conditions, covenants, and restrictions (CC&R's), the homeowners association had been formed to enforce the CC&R's, and it was authorized to expend assessments to enforce the CC&R's. (Id., at pp. 217-218.) The appellate court held the assessment was unauthorized. It reasoned that the only relevant provision of the CC&R's prohibited "noxious or offensive" activities, annoyances, and nuisances on the property; there was no provision regarding nuisances emanating from outside. (Id., at 218-219.) Here, the purpose of the Associations was not limited to enforcement of the CC&R's. Spitser is completely inapplicable.

[FN 2] Plaintiffs base the present contention entirely on the Associations' general purposes and powers. They never argue that, even assuming the governing documents did permit the contributions, they did not permit the imposition and/or the expenditure of assessments for this purpose. In their briefs, plaintiffs never quote or even discuss the provisions of the governing documents regarding assessments. We deem any such contention waived.
We conclude that the contributions did not violate the governing documents of the Associations.


C. The Davis-Stirling Common Interest Development Act.

The Davis-Stirling Common Interest Development Act (the Act) provides: "[T]he association shall prepare . . . : [¶] (a) A pro forma operating budget, which shall include . . . : [¶] (1) The estimated revenue and expenses . . . ." (Civ. Code, s. 1365, subd. (a)(1).) "[T]he association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title.■ (Civ. Code, s. 1366, subd. (a).) "An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied." (Civ. Code, s. 1366.1.)

As we have already held in part IV.B, ante, the contributions were not ultra vires. Thus, they were a legitimate expense of the Associations for which assessments could be lawfully levied. Plaintiffs argue that " . . . none of the funds used here was originally collected for the purpose of making a political donation . . . ." We do not read the Act, however, as requiring an association to itemize in advance each and every cost for which assessments will ultimately be used.

Plaintiffs also point out that the Act places certain limitations on the expenditure of "funds designated as reserve funds." (Civ. Code, s. 1365.5, subd. (c)(1).) There is no conclusive evidence, however, that any of the contributions were made out of "reserve funds" within the meaning of the Act. Plaintiffs point to indications in the record that some (though by no means all) of the contributions were made from funds designated "[u]nappropriated [e]xpenditure reserve." The very label "unappropriated expenditure reserve" seems inconsistent with the Act's concept of "reserves" as funds identified for use to repair, replace, or maintain major components.. (See Civ. Code §§ 1365, subd. (a)(2)(B), 1365.5 subd. (f)(1).) Certainly we cannot say there was no triable issue of fact with respect to whether the contributions violated the Act in this respect.

Given our resolution of these issues, it follows that the trial court correctly denied plaintiffs' motion for summary adjudication on the first cause of action. Plaintiffs also contend the trial court erred by denying summary adjudication on their second cause of action, for conversion. This cause of action, however, was premised on the allegations of the first cause of action. Thus, the trial court also correctly denied the motion for summary adjudication on the second cause of action. It also follows that, to the extent that plaintiffs sought a preliminary injunction based on these causes of action, the trial court properly denied a preliminary injunction based on the lack of probability of success on the merits. (Teachers Ins. & Annuity Assn. v. Furlotti (1999) 70 Cal.App.4th 1487, 1498.)

Continued in Part Two