American Rule Regarding Legal Fees
"All too often attorney fees become the tail that wags the dog in litigation." (Deane Gardenhome v. Dentkas (1993) 13 Cal.App.4th 1394, 1399)
The American Rule. “With regard to an award of attorney fees in litigation, California generally follows what is commonly referred to as the ‘American Rule,’ which provides that each party to a lawsuit must ordinarily pay his/her attorney fees. The American Rule is codified in Code of Civil Procedure section 1021, which states in relevant part: ‘Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties.’” (Tract 19051 HOA v. Kemp (2015) 60 Cal.4th 1135, 1142) California law requires express authorization, by statute or contract, for an award of attorney's fees to the prevailing party. (Code Civ. Proc. § 1021)
Davis-Stirling Authorization. The Davis-Stirling Act authorizes the award of attorneys' fees if an association incurs them in enforcing its governing documents. (Civ. Code § 5975) However, neither homeowners nor associations are entitled to legal fees incurred in a dispute that does not lead to litigation. For example, each side hires a lawyer and exchanges letters with demands and counter-demands. Neither side is entitled to their attorney's fees if the matter is resolved or dies away. An exception is sometimes found in governing documents that allow the association to impose a reimbursement assessment for attorneys' fees incurred in sending cease-and-desist letters and related actions by legal counsel.
Statutes Authorizing Attorneys' Fees
The following statutes provide for attorneys' fees and/or costs:
Prelitigation Legal Fees
Civil Code § 5975 only authorizes a prevailing owner to recover their reasonable attorneys’ fees and costs following the conclusion of a successful action. If the dispute turns into litigation, the prevailing party is entitled to reasonable attorney's fees as determined by the court, depending on the nature of the dispute. The starting point for calculating attorneys' fees begins with prelitigation ADR, since ADR mandated by the Davis-Stirling Act is the start of litigation. (Grossman v. Park Fort Washington)
Directors Are Protected from Legal Fees
Too often, the plaintiff's attorneys name individual directors when filing an action to enforce the governing documents. Civil Code § 5975 only authorizes a fee award against the association, not against its volunteer directors. Subsection (c) provides that in an action against a homeowners’ association, “to enforce the governing documents, the prevailing party shall be awarded reasonable attorney’s fees and costs.” Subsections (a) and (b) define the proper parties to such an action, which include only the association and property owners—not volunteer directors:
- The covenants and restrictions in the declaration shall be enforceable equitable servitudes unless unreasonable. They shall inure to the benefit of and bind all owners of separate interests in the development. Unless the declaration states otherwise, these servitudes may be enforced by any owner of a separate interest, by the association, or by both.
- A governing document other than the declaration may be enforced by the association against an owner of a separate interest or by an owner of a separate interest against the association.
By statute, volunteer officers and directors are protected against personal liability for mistakes they make while carrying out their duties. Only the association, not its directors, is granted standing to defend an enforcement action. (Civ. Code, § 5980) Furthermore, imposing personal liability for attorney fees on volunteer directors contravenes public policy.
The Legislature finds and declares that the services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California. The willingness of volunteers to offer their services has been deterred by a perception that their personal assets are at risk for these activities. ...It is the public policy of this state to provide incentives and protection to the individuals who perform these important functions. (Corp. Code § 5047.5(a))
Attorneys' Fees Case Law
Champir LLC v. Fairbanks Ranch (2021). The decision clarifies that once a party has achieved its litigation objective of enforcing the CC&Rs and litigation is no longer necessary, it may dismiss the action and obtain judgment for its attorneys' fees. Previously, courts struggled with jurisdictional issues of granting judgment for fees after a case was dismissed.
Marina Pacifica v. S.C. Fin. Corp. (2018). A party's failure to obtain its litigation objective does not automatically make the other party the prevailing party.
Artus v. Gramercy Towers (2018). Neither the language of the Davis-Stirling Act nor the legislative history of the fee provision Artus invokes evidence of any intent on the part of the Legislature to depart from well-established principles that fees and costs are ordinarily not granted for interim success and that the prevailing party is determined. Fees and costs are awarded at the conclusion of the litigation.
Retzloff v. Moulton Parkway (2017). Former board members sued their association, alleging the board was conducting business outside of meetings and failing to maintain and provide certain corporate records. Plaintiffs did not attempt ADR as required by Civil Code § 5950. The association demurred, and the court sustained without leave to amend. As the prevailing party, the association moved for attorneys' fees. The Court of Appeal reversed the lower court's award of attorney's fees, concluding that Civil Code § 5235 does not authorize a court's discretion to award fees to a prevailing association. A plain reading of “any costs” as used in section 5235(c) does not support the inclusion of attorney fees as costs. Section 5235(c) entitles a prevailing association to costs, not attorney fees and costs.
Almanor Lakeside Villas v. Carson (2016). Even though the court struck down 90% of the association's fines against an owner for a rental violation, the court held that the key issue was the association's right to enforce rules and impose penalties for violations, thereby making it the prevailing party.
The Davis-Stirling Act does not define “prevailing party” or provide a rubric for that determination. In the absence of statutory guidance, California courts have analyzed analogous fee provisions and concluded that the test for the prevailing party is a pragmatic one, namely, whether a party prevailed on a practical level by achieving its main litigation objectives. (Heather Farms v. Robinson (1994) 21 Cal.App.4th 1568, 1574 (Heather Farms); Salehi, supra, at pp. 1153–1154) The California Supreme Court implicitly has confirmed this test. In Villa De Las Palmas v. Terifaj (2004) 33 Cal.4th 73, 94, the court affirmed the award of attorney’s fees in an action to enforce a restrictive covenant under the Davis-Stirling Act, stating: “We conclude the trial court did not abuse its discretion in determining that the Association was the prevailing party… On a ‘practical level’ 13 [citation], the Association ‘achieved its main litigation objective.’ ” (Ibid. [quoting Heather Farms, at p. 1574 and Rancho Santa Fe v. Dolan-King (2004) 115 Cal.App.4th 28, 46])
Nellie Gail Ranch v. McMullin (2016). Failure to appeal a fee ruling deprives an appellate court of jurisdiction to decide the fee challenge.
Rancho Mirage Country Club v. Hazelbaker (2016). An association's lawsuit to enforce a settlement agreement entered into during ADR is deemed an action to enforce the governing documents under the Davis-Stirling Act, which entitles the association to recover reasonable attorneys' fees. Also, a trial court cannot deny attorney fees to a prevailing HOA. Only the amount of the award is committed to the trial court's sound discretion.
Tract 19051 HOA v. Kemp (2015). The prevailing owner can recover attorney fees under Civil Code section 5975(c) in a case brought by an association against the owner to enforce governing documents, even though the court found the association didn’t exist. The Supreme Court held that the plain reading of 5975(c) supports a reciprocal award of attorney fees in an action where the association brings the claim to enforce the governing documents, regardless of whether the association exists. The recovery is based solely on the association’s claim to enforce the governing documents and not on determining whether the association is a common interest development.
Grossman v. Park Fort Washington (2012). Normally, any attorneys' fees incurred before the complaint is filed are not awarded. Here, the court concluded that the prelitigation ADR process mandated by the Davis-Stirling Act is the start of litigation. Accordingly, it awarded the homeowner's attorneys' fees incurred in prelitigation ADR.
Salehi v Surfside III (2011). Susan Salehi sued her association, alleging ten causes of action. Three days before trial, she dismissed eight of her ten claims against the association. The association spent approximately $250,000 defending against her claims. The association subsequently sought recovery of the legal fees it incurred defending against Salehi's dismissed causes of action. The trial court denied the association’s request, but the court of appeals reversed. The appellate court found that the association was entitled to recover attorneys' fees from Salehi, reasoning that a party suing to enforce the CC&Rs must get their “ducks in a row” procedurally and substantively before filing suit. Salehi had done neither.
That v. Alders Maintenance Ass'n (2012). That brought a frivolous election challenge. As the prevailing party, the association sought attorneys' fees under the Davis Stirling Act. The award of attorneys' fees is allowable only when authorized by contract, statute, or law. If a statute refers to the award of "costs and attorney's fees," attorney's fees are an item and component of the costs to be awarded and are allowable as costs. The court reviewed the statute (now Civ. Code § 5145(b)) and concluded the statute did not authorize associations to recover attorney's fees.
Bear Creek v. Ferwerda (2011). If empowering language is provided for in the CC&Rs, architectural committees may adopt standards beyond those outlined in the CC&Rs, i.e., they can adopt new design standards related to the improvement or development of lots. However, a committee may not unilaterally establish an attorney’s fees provision for itself. Attorneys’ fees must be reciprocal and contractual — the committee's fee provisions did not seek to clarify existing language in the CC&Rs. Rather, they were an inappropriate attempt to insert a new provision that bound homeowners without their approval. Nothing in the CC&Rs gave the committee the power to insert an attorney fee provision into their architectural standards that was never in the CC&Rs.
Parrott v. Mooring Townhomes (2003). The plaintiff sought a preliminary injunction against his association. When he failed to receive one, he dismissed his complaint. The court awarded the association attorneys' fees. A prevailing party is one that prevails on the merits.
Mount Olympus POA v. Shpirt (1997). An owner does not have the right to recover attorneys' fees under the Davis-Stirling Act if his HOA is a voluntary association of homeowners having no power to charge or collect assessments. Such associations do not fit the definition of a common interest development under the Act.
Heather Farms HOA v. Robinson (1994). The court declined to adopt a rigid interpretation of the term "prevailing party" and, instead, analyzed which party had prevailed on a practical level. The court concluded that a voluntary mutual dismissal as part of a global settlement does not render a party the prevailing party.
Additional Resources
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