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Raven’s Cove Case Holds That Developer/Builder Controlled Boards Owe a Duty to the Association
Our team at the Naumann Law Firm wanted to briefly share with you an important case in construction defect law that help set legal standard for many future construction defect cases.
In the 1981 case of RAVEN’S COVE TOWNHOMES, INC. et al., v. KNUPPE DEVELOPMENT COMPANY, INC. et al., the court held that a developer-controlled board had a fiduciary duty to set proper reserves, and when there is a turnover from developer-controlled board to a homeowner-controlled board, there must be proper amounts in reserves.
Raven’s Cove Townhomes (homeowners Association) brought action for defects in the common area landscaping, defects in exterior walls of individual units, and for breach of fiduciary duty against Knuppe Development (developer) and initial directors of the Association. Often, the first board of directors of an Association is comprised of developer or builder entities and/or their employees.
The Association lost, appealed, and the decision was reversed and remanded.
The Court of Appeal held that:
- The Association had standing to sue on its own behalf for damage to common areas.
- Expert testimony was sometimes not necessary if the defects could be understood by a lay person.
- Developers and their employees as former directors in control of the Association breached their fiduciary duty and were individually liable to the Association for said breach.
The court found the initial developer-controlled board failed to exercise supervision which permitted mismanagement and was ground for the breach of fiduciary duty by the developer during the initial period of the Association, as they were in control of the board.
The court also concluded that that the Association’s original directors (developer-controlled) admittedly failed their supervisory and managerial responsibilities which were to assess each unit for an adequate reserve fund and acted with a conflict of interest. The court found that they were liable to the Association for breach of basic fiduciary duties and basic duties of good management.
The court explained that these developer-controlled board members have a clear conflict of interest:
“Thus, a developer and his agents and employees who also serve as directors of an Association, like the instant one, may not make decisions for the Association that benefit their own interests at the expense of the Association and its members.”
The court believed the solution for the damages is the cost of remedying the defects in the landscaping and repairing of the homeowners’ individual properties along with the value of lost use (if any).
THINGS TO REMEMBER
WHEN MAJORITY CONTROL TRANSFERS FROM THE DEVELOPER-CONTROLLED BOARD TO THE HOMEOWNERS, REVIEW THE RESERVE ACCOUNT OR ORDER A RESERVE STUDY TO MAKE SURE THE DEVELOPER HAS LEFT THE ASSOCIATION WITH THE PROPER RESERVES!
If you have any questions about this case or it sounds similar to a situation that you’re in, please give our law firm a call. To learn more about construction defects and litigation, click our construction defect litigation page.
If you’re a homeowner or association seeking representation in construction defect litigation, our team at Naumann Law Firm in San Diego can help. To contact us, call 844-492-7474 or visit our San Diego construction defect contact page. We also work with clients in Los Angeles, Orange County, Riverside, San Bernardino.