Recovering Pre-Litigation Attorney’s Fees in HOA Disputes

*New Case Law

In our recent blog post entitled “Are Attorney’s Fees for ADR Recoverable?” we touched briefly on the recently decided case of Grossman v. Park Fort Washington Association (2012) 212 Cal. App. 4th 1128 (“Grossman”). In response to requests for more information on this issue from our clients and industry partners, we felt it necessary to further address the reasoning behind the court’s ruling in Grossman.

In Grossman, a dispute between a homeowners association (“HOA”) and a homeowner relating to a claimed architectural violation was resolved by the trial court in favor of the homeowners. In awarding the homeowners attorney’s fees and costs arising from both pre and post-litigation activities, the trial court cited Civil Code Section 1354(c), which states that “[i]n an action to enforce the governing documents, the prevailing party shall be awarded reasonable attorney’s fees and costs.” (Emphasis added.)

The HOA objected to the award based on its argument that the statute did not authorize awarding pre-litigation attorney’s fees (fees incurred in participating in ADR) because such fees were not incurred as part of the action (the lawsuit) to enforce the governing documents. However, the appellate court disagreed with the HOA and ultimately affirmed the ruling, noting several key points…

First, in looking to the plain language of Section 1354(c) the appellate court noted that the text does not explicitly limit the recovery of attorney’s fees and costs to those items incurred in the lawsuit itself. Rather, the statute requires only (1) the existence of an action to enforce the governing documents, and (2) the existence of a prevailing party in that action. Both of those requirements were established in Grossman.

Further, the appellate court determined that the critical word in determining whether attorney’s fees were recoverable was the term “reasonable.” Accordingly, attorney’s fees incurred in ADR should be recoverable so long as they may be deemed “reasonable.” The appellate court then looked to Civil Code Section 1369.520(a) which requires the parties in a dispute to utilize alternative dispute resolution (“ADR”) prior to the filing of a lawsuit. In reflecting upon Section 1369.520(a), the appellate court noted that, “this provision effectively makes ADR mandatory and, therefore, precludes a determination that the time and effort spent pursuing ADR was unreasonable per se.” Accordingly, given each party’s mandatory involvement in ADR, the court found that the costs involved in participating in such pre-litigation activities carried a presumption of reasonableness, and were therefore recoverable under Section 1354(c).

The appellate court also noted that to categorize all such fees as unreasonable would be directly contrary to the strong public policy of “promoting the resolution of disputes through mediation and arbitration.” Awarding such fees thus benefits the public by encouraging parties to resolve their disputes early on in order to reduce the strain on an already burdened judicial system.

Although the ruling in Grossman will be of benefit to HOAs in bringing legal action to enforce their governing documents, HOA Boards should recognize that it can also cut against the HOA should the homeowner ultimately prevail. Boards should exercise caution in serious disputes and consult with their HOA attorney when ADR and/or litigation becomes likely.

Content provided by TLG attorney Kai MacDonald.