Lake Arrowhead Chalets Timeshare Owners Association v. Lake Arrowhead Chalets Owners Association

LAKE ARROWHEAD CHALETS TIMESHARE OWNERS ASSOCIATION et al., Plaintiffs and Appellants, v. LAKE ARROWHEAD CHALETS OWNERS ASSOCIATION et al., Defendants and Appellants. No. E015526 (Super.Ct.No. SCV270485) California Court of Appeal Fourth Appellate District Division Two Filed January 3, 1997
THE COURT:
        Good cause appearing, certification of the opinion for nonpublication, dated December 12, 1996, is hereby vacated and set aside.
        IT IS ORDERED that said opinion be certified for partial publication pursuant to California Rules of Court, rules 976(b) and 976.1, with the exception of parts A, B, and D.

We concur:
        HOLLENHORST, Acting P. J.
        WARD,         J.







LAKE ARROWHEAD CHALETS TIMESHARE OWNERS ASSOCIATION et al., Plaintiffs and Appellants, v. LAKE ARROWHEAD CHALETS OWNERS ASSOCIATION et al., Defendants and Appellants. No. E015526 (Super.Ct.No. SCV270485) California Court of Appeal Fourth Appellate District Division Two Filed December 12, 1996
Certified for Partial Publication
        APPEAL from the Superior Court of San Bernardino County. Jeffrey L. Giarde, Judge. (Judge of the Municipal Court, assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Reversed with directions.
        Fiore, Walker, Racobs & Powers, Peter E. Racobs and Margaret G. Wangler for Plaintiffs and Appellants.
        Feldsott, Lee & Feinberg, Martin L. Lee and Stanley Feldsott for Defendants and Appellants.

FACTUAL AND PROCEDURAL BACKGROUND         The Lake Arrowhead Chalets is a 62-unit residential condominium project. It is governed by the Lake Arrowhead Chalets Owners Association ("Condominium Association"). Of the 62 units, 24 are operated as timeshare facilities. The timeshare units are governed by the Lake Arrowhead Chalets Timeshare Owners Association ("Timeshare Association").
        A meeting of the members of the Condominium Association was held on February 1, 1992, to elect new members of the association's board of directors and to vote on a proposed third amendment to the association's bylaws. Mr. Dave Burdick, a member of the boards of directors of both the Condominium Association and the Timeshare Association, appeared at the meeting, purporting to be empowered to vote on behalf of the owners of the 24 timeshare units. Burdick cast the votes of those 24 units against the proposed bylaws amendment, but the Condominium Association refused to recognize either his authority or the validity of his vote. Accordingly, the third amendment was declared to have been adopted by a vote of 36 to 0.
        In March of 1992, the Timeshare Association and Bruce Rummer, an individual member of the Condominium Association, sued the Condominium Association and two of its officers and directors, Linda Hanneman and James Genn. As ultimately amended, that action sought (1) a declaration that the third amendment to the Condominium Association's bylaws was invalid, (2) a declaration that a prior second amendment to the bylaws was rescinded, (3) damages against Hanneman and Genn for alleged violations of fiduciary duty, and (4) a variety of injunctive relief. The Condominium Association cross-complained against the Timeshare Association in June of 1992, seeking a declaration that various provisions of the declaration of covenants, conditions and restrictions under which the Timeshare Association operated were invalid.
        In May of 1994, the plaintiffs represented that they had reached a settlement of their dispute with the Condominium Association and applied for a determination that the settlement was in good faith. (Code Civ. Proc., § 877.6, subd. (a)(2).) The Condominium Association contested the settlement. (Ibid.) The trial court denied the application in August of 1994.
        Meanwhile, in June of 1994, the plaintiffs moved for an order (1) disqualifying defense counsel, Feldsott, Lee & Feinberg, from continuing to represent either the Condominium Association or the individual defendants, and (2) restraining the Condominium Association from continuing to pay the costs of defense of the individual defendants. Both aspects of the motion were denied.
        The declaratory relief claim concerning the validity of the third amendment to the Condominium Association bylaws was bifurcated from all other issues. Trial on that issue began on August 18, 1994. At the conclusion of the plaintiffs' case in chief, the defendants successfully moved for judgment. (Code Civ. Proc., § 631.8.) In particular, the court determined that the third amendment was valid.
        The Condominium Association then dismissed its cross-complaint. Shortly thereafter, the plaintiffs dismissed the remaining causes of action of their complaint. All claims having been resolved either through trial or dismissal, a judgment was entered in favor of the defendants.
        Relying on Civil Code section 1354, subdivision (f ), the defendants then moved for an award of over $200,000 in attorney's fees. Their motion was denied.
        The plaintiffs appeal from the judgment against them. The defendants cross-appeal from the denial of their motion for attorney's fees.

CONTENTIONS         The plaintiffs contend that the judgment should be reversed because the trial court erred in refusing to approve the settlement with the Condominium Association, refusing to disqualify defense counsel, and finding that the third amendment was valid. On the cross-appeal, the defendants contend that the trial court erred by denying their motion for attorney's fees. In addition, arguing that the plaintiffs' appeal is frivolous, the defendants have moved for an award of attorney's fees on appeal, pursuant to Code of Civil Procedure section 907 and California Rules of Court, rule 26.

DISCUSSION
A.        A DENIAL OF AN APPLICATION FOR APPROVAL OF A GOOD-FAITH
        SETTLEMENT IS NOT REVIEWABLE IN AN APPEAL FROM THE
        SUBSEQUENT JUDGMENT.
        "When a determination of the good faith or lack of good faith of a settlement is made, any party aggrieved by the determination may petition the proper court to review the determination by writ of mandate. The petition for writ of mandate shall be filed within 20 days after service of written notice of the determination . . . ." (Code Civ. Proc., § 877.6, subd. (e).) A timely petition for a writ of mandate is the only means of obtaining appellate review of the trial court's determination. (Housing Group v. Superior Court (1994) 24 Cal.App.4th 549, 552.) If an aggrieved party fails to avail itself of that remedy, its objections to the ruling are not cognizable in an appeal from the subsequent judgment. (Diamond Heights Homeowners Assn. v. National American Ins. Co. (1991) 227 Cal.App.3d 563, 583.)
        The plaintiffs did not seek immediate review of the denial of their application for a determination of the good faith of their settlement by petitioning this court for a writ of mandate. Nor can their appeal be construed to be such a petition, because it was not filed within the statutory time limits. (Code Civ. Proc., § 877.6, subd. (e).) Accordingly, if Code of Civil Procedure section 877.6, subdivision (e), applies to the trial court's ruling, their objections to that ruling may no longer be considered.
        The plaintiffs argue that Code of Civil Procedure section 877.6 does not apply. They note that, in denying their application, the trial court did not reach the issue of whether or not the settlement was in bad faith -- i.e., that it was unfair to the non-settling defendants -- under the standards established in Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488 and its progeny. Instead, the trial court found that although the plaintiffs reached a settlement with the members of the Condominium Association, only its board of directors was authorized to enter into such a settlement agreement on behalf of the association. Since Code of Civil Procedure section 877.6, subdivision (e), refers only to the means of reviewing "a determination of the good faith or lack of good faith of a settlement," they conclude that it does not apply to a ruling based upon a determination that no enforceable settlement existed at all.
        The plaintiffs' construction of the statutory language is too narrow. A determination that a settlement is in good faith necessarily includes the preliminary finding that a settlement exists. By the same token, an application for a determination of a settlement's good faith may be denied either because the settlement is not in good faith or because the settlement itself does not exist or is otherwise unenforceable. In our view, both the ultimate determination and the preliminary finding must be reviewed by the means specified in Code of Civil Procedure section 887.6.
        No other conclusion makes sense. The purpose of Code of Civil Procedure section 877.6, subdivision (e), is to promote the settlement of disputes and the finality of those settlements by affording immediate writ review to parties aggrieved by a good-faith determination. (Barth-Wittmore Ins. v. H. R. Murphy Enterprises, Inc. (1985) 169 Cal.App.3d 124, 130-131.) "Where review of a settlement must await conclusion of the entire case, the intended finality is absent and promotion of settlement obviously thwarted." (Id., p. 130.) Postponing review of a decision that no binding settlement exists would cause no less delay than the postponement of a decision that the settlement exists but is not in good faith.
        Not only does the statute require that review be sought by petition for a writ of mandate rather than appeal, but it subjects those petitions to a comprehensive system of extraordinarily accelerated deadlines. The petition must be filed within 20 to 40 days; the appellate court must decide whether to issue the alternative writ within 30 days thereafter; and the hearing is entitled to priority over all other civil matters. (Code Civ. Proc., § 877.6, subd. (e) (1) & (2).) The obvious purpose is to have the determination reviewed as quickly as possible so that the status of the settlement is finally decided prior to trial. That goal would be frustrated if those accelerated deadlines applied to some rulings on applications for approval of good-faith settlements but not to others.
        In summary, we believe that all rulings on such applications are subject to subdivision (e) of Code of Civil Procedure section 887.6, regardless of the particular reasoning employed by the trial court in granting or denying the application. Since the procedure specified in that subdivision is the exclusive means of obtaining appellate review of rulings on those applications, and since the plaintiffs did not follow that procedure, their objections to the trial court's denial of their application are no longer subject to appellate review. In particular, those objections are not cognizable in their appeal from the ultimate judgment.

B.        THE DENIAL OF THE PLAINTIFFS' MOTION TO DISQUALIFY DEFENSE
        COUNSEL MAY NOT BE REVIEWED IN AN APPEAL FROM THE FINAL
        JUDGMENT.
        In moving to disqualify defense counsel, the plaintiffs argued that the interests of the Condominium Association and the two individual defendants conflicted with each other, and that the Condominium Association had not waived that conflict. The trial court denied the motion without comment. The plaintiffs seek review of that decision.
        Our Supreme Court has held that rulings on motions to disqualify are separately appealable, either as orders granting or denying preliminary injunctions or as final orders on a collateral issue. (Meehan v. Hopps (1955) 45 Cal.2d 213, 215-218.) Appealable pretrial orders may not be reviewed in an appeal from the final judgment. (Code Civ. Proc., § 906.) Since the plaintiffs did not appeal from the denial of their motion, and since the time to do so had expired by the time the instant appeal was filed, ¹ their challenges to the trial court's ruling cannot be considered. ²

C.        THE THIRD AMENDMENT TO THE BYLAWS IS INVALID.
        The plaintiffs' principal argument is that the trial court erred on the merits of the only issue tried, i.e., the validity of the third amendment to the Condominium Association's bylaws. In particular, they contend that the amendment is invalid for three reasons: (a) the notice of the meeting at which it was adopted was inadequate; (b) there were insufficient favorable votes to adopt the amendment; and (c) the amendment was not approved by the owners of the timeshare units, as required by Corporation Code section 7150, subdivision (b). Finding the last issue to be dispositive, we address it first.
        Since the initial adoption of the bylaws of the Condominium Association, they have been amended three times. The first amendment increased the number of directors from five to seven. The second amendment provides that four of the seven directors shall be owners of whole condominium units, while the remaining three directors shall be owners of fractional interests in timeshare units. The third amendment, which is the subject of this action, provides that "'only timeshare owners/representatives may vote for the three (3) seats on the Board of Directors occupied by the timeshare owners. Only the condominium owners may vote for candidates for the remaining four (4) seats on the Board of Directors.'"
        Subdivision (b) of Corporations Code section 7150 establishes certain restrictions on the powers of a mutual benefit corporation's members to amend its bylaws. ³ In particular, it provides that some amendments, although approved by the members generally, are not effective unless they are also approved by the members of a class. (Ibid.) Among the proposed amendments requiring class approval are those which would "[a]uthorize a new class of memberships" (id., subd. (b)(6)) or "[m]aterially and adversely affect the rights, privileges, preferences, restrictions or conditions of that class as to voting . . . in a manner different than such action affects another class" (id., subd. (b)(1)).
        The plaintiffs contend that the third amendment creates a new and disadvantaged class of members, and is therefore ineffective because it was not approved by the members of that new class. They are correct.
        "'Class' refers to those memberships which . . . have the same rights with respect to voting . . . ." (Corp. Code, § 5041.) By specifying that the timeshare owners could only vote for the directors who would constitute a minority of the board, while the whole-unit owners would select the board's majority, the third amendment created two classes of members. We cannot accept the trial court's finding to the contrary.
        Not only did the third amendment divide the members into two classes, but it materially and adversely affected the voting rights of the minority, timeshare class. Prior to the amendment, the timeshare members of the association, though owners of a minority of the units, had the chance to elect a majority of the board of directors. ⁴ After the division of the membership into two classes, only the whole-unit owners had that opportunity. Thereafter, the timeshare owners could never elect a majority of the board, regardless of how much greater their degree of organization and voter turn-out compared to the owners of the whole units.
        The defendants deny that the change in voting rights was adverse to the timeshare owners, arguing that in fact the change benefited the timeshare owners by guaranteeing that they would always have some representation on the board. They concede, however, that another effect of the amendment would be to prevent the continuation of the practice by which a passive majority of (whole-unit) owners, through their lack of participation, allowed an active minority (the timeshare owners) to control the board. Thus, we cannot say as a matter of law that the effect of the amendment were entirely beneficial to the timeshare owners. ⁵ Because the amendment confers potential disadvantages as well as potential advantages, the weighing process is reserved for the members of the affected class. (Corp. Code, § 7150, subd. (b).)
        Since the owners of the timeshare units did not approve the third amendment, it was not validly adopted, and thus is not effective, even though it was approved by a majority of the members. Therefore, we need not decide whether the Condominium Association failed to give adequate notice at the meeting at which the amendment was purportedly approved, or whether there would have been sufficient favorable votes cast by the members to adopt the amendment in the absence of the need for separate votes by class. The judgment declaring that the amendment was validly adopted and effective must be reversed.

D.        THE ISSUE RAISED IN THE DEFENDANTS' CROSS-APPEAL IS MOOT.
        Since the defendants' motion for attorney's fees presupposes a judgment in their favor, the reversal of that judgment renders moot their challenges to the trial court's denial of that motion. Similarly, since the plaintiffs' appeal is meritorious, the defendants' motion for attorney's fees for an allegedly frivolous appeal is denied.

DISPOSITION         The judgment is reversed. Having decided the invalidity of the adoption of the third amendment to the Condominium Association's bylaws as a matter of law, we direct the trial court to enter a declaratory judgment in favor of the plaintiffs.


We concur:
        HOLLENHORST, Acting P. J.
        WARD, J.


¹ 1.         Notice of entry of the order denying the motion was given on June 23, 1994. Accordingly, the plaintiffs had only 60 days from that date in which to appeal. (Cal. Rules of Court, rule 2(a).) The instant notice of appeal was not filed until December 2, 1994.
         ² .         Arguably, the first rationale of Meehan does not apply here, where there was no attempt to enjoin counsel, and the second rationale is erroneous. (See Truck Ins. Exchange v. Fireman's Fund Ins. (1992) 6 Cal.App.4th 1050, 1052, fn. 1.) However, even if we were to conclude that the alternative holding of Meehan is incorrect, we are not empowered to disregard the holdings of the Supreme Court on this or any other issue. (Ibid.; Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.)
        Even assuming that the order was not separately appealable, and assuming further that the trial court abused its discretion in denying the motion, the plaintiffs would not be entitled to any relief. "[O]n appeal from a final judgment, an issue of attorney disqualification may not be raised unless it is accompanied by a showing that the erroneous granting or denying of a motion to disqualify affected the outcome of the proceeding to the prejudice of the complaining party." (In re Sophia B. (1988) 203 Cal.App.3d 1436, 1439.) Here, the plaintiffs do not explain how the denial of the motion deprived them of a fair trial.
         ³ .         The statutory restrictions on the power of a corporation's board to amend bylaws (Corp. Code, § 7150, subd. (a)), to which the defendants refer, are irrelevant. A board may not amend the bylaws if the bylaws withhold that power. (Corp. Code, § 7150, subd. (c).) Here, the bylaws specify that the power to amend is solely in the hands of the members.
         ⁴ .         Since the term of office of directors is only one year, all seven seats are open at the annual election. The election is held at the annual meeting. A quorum for the meeting is 51 percent of the units. Thus, under the pre-amendment bylaws, an election could be decided on just 32 votes. If all 24 timeshare units participated in the election and voted cumulatively for 4 candidates, each candidate would receive 42 votes (24 x 7 / 4). If the 8 whole-unit owners who attended also voted cumulatively for 4 candidates, each would receive only 14 votes. Under the old system, therefore, the timeshare units could (and apparently, frequently did) elect a majority of the board because they participated in the election in greater numbers and voted as a block. Under the third amendment, however, the whole-unit members would be ensured of a majority of the board, regardless of how few of them bothered to turn out and vote.
         ⁵ .         Indeed, if the amendment were entirely beneficial to the timeshare owners and adverse to the whole-unit owners, one would be hard-pressed to explain why the timeshare owners have spent so much time and attorney's fees to prevent the amendment from going into effect, or why the whole-unit owners have worked so long and hard to enforce it. The Condominium Association's actions speak louder than its words.