Attorney’s Fees are Recoverable to Enforce Settlement Agreement Reached in ADR

*New Case Law

The Davis-Stirling Act promotes the nonjudicial resolution of disputes between homeowners associations (“HOAs”) and their members in various respects. One example is found contained in Civil Code Sections 5930 et. seq.  which, in sum, require that the disputing parties to endeavor to resolve the dispute through Alternative Dispute Resolution (“ADR”) before a lawsuit is filed. ADR is essentially a form of mediation that uses a neutral third-party mediator (often a retired judge) to assist the parties in securing a mutually acceptable resolution.

Experienced HOA Board members, management professionals, and attorneys understand that ADR is often successful in resolving a dispute before it escalates to costly and protracted litigation. That resolution is typically memorialized in a written settlement agreement negotiated during ADR and executed by the parties. The settlement agreement often governs what actions must be taken by the parties within specified time frames. For example, in an architectural dispute, the settlement agreement may require the homeowner to take corrective measures (i.e., to modify or remove unapproved architectural improvements) within a specified time frame.

However, in some instances, a party to the settlement agreement may subsequently fail to honor its terms. The other party is then placed in a position of having to take legal action to enforce the other party’s compliance with the settlement agreement. The enforcing party may then have concerns regarding its ability to recover its attorney’s fees in taking such action. While the Davis-Stirling Act allows for a prevailing party in an action to enforce a HOA’s governing documents to recover its attorney’s fees, it is unclear whether enforcement of a settlement agreement reached at ADR constitutes such an enforcement action.

Fortunately, the recent case of Rancho Mirage Country Club HOA v. Hazelbaker (2016) 2 Cal. App. 5th 252 (“Hazelbaker”) addressed this exact issue…

In Hazelbaker, the Defendant homeowners obtained HOA approval to make improvements to their patio in compliance with the HOA’s CC&Rs. The HOA subsequently determined that the improvements exceeded the scope of the approval and then requested ADR with the Defendant homeowners. At ADR, the parties reached an agreement that provided for modifications to the patio, and a special assessment against the Defendant homeowners to pay a portion of the attorney’s fees the HOA had incurred through ADR. The agreement did not provide for the prevailing party in a subsequent legal action to enforce the agreement to recover its attorney’s fees.

The Defendant did not complete the required modifications within the required time frames. The HOA then filed a court action seeking specific performance of the agreement, as well as recovery of its attorney’s fees and costs incurred in taking legal action. The trial court found the HOA to be the prevailing party and awarded it its attorney’s fees and costs, pursuant to the Davis-Stirling Act – Civil Code Section 5975(c).

The Defendant then appealed the ruling, contending that, among other things, the enforcement of the settlement agreement did not constitute “an action to enforce the governing documents,” and the HOA was therefore not entitled to recover its attorney’s fees.

The Court of Appeal rejected the Defendant’s argument, stating in pertinent part that:

“The Davis-Stirling Act is intended, among other things, to encourage parties to resolve their disputes without resort to litigation, by effectively mandating pre-litigation ADR. . . . Narrowly construing the phrase ‘action to enforce the governing documents’ to exclude actions to enforce agreements arising out of that mandatory ADR process would discourage such resolutions, and encourage gamesmanship. For example, a party might agree to a settlement in mediation without any intention of fulfilling its settlement obligations, but simply to escape the cost-shifting provisions of the Davis-Stirling Act. It is unlikely, therefore, that a narrow construction is preferable.

. . . Moreover, the gravamen of the Association’s complaint is that defendants have not taken certain steps to bring their property into compliance with the applicable CC&Rs. . . . The circumstance that the steps to bring the property into compliance with CC&Rs were specified in a mediation agreement does not change the underlying nature of the dispute between the parties, or the nature of the relief sought by the Association.”

The Court of Appeal ultimately held that the Davis-Stirling Act was the proper basis for an award of attorney’s fees and costs to the prevailing party. The Court of Appeal further reiterated how the “prevailing party” is the party who, on a practical level, achieved its main litigation goals (Heather Farms HOA v. Robinson (1994) 21 Cal. App. 4th 1568, 1574). In Hazelbaker, because the HOA in fact achieved its pre-litigation and litigation goals of having the Defendant homeowners make modifications to their patio and thus securing their compliance with the CC&Rs, the trial court did not abuse its discretion in determining the HOA to be the prevailing party.