LNSU #1, LLC v. McLaughlin
Adams Stirling PLC
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LNSU #1, LLC V. McLAUGHLIN
California Court of Appeal, Fourth District, Division One
(December 14, 2018) UNPUBLISHED 
 

COUNSEL
James E. Friedhofer; Knottnerus & Associates, Wilfred Knottnerus and Mark B. Simpkins for Plaintiffs and Appellants.

Gordon & Rees, Craig J. Mariam, John B. Fraher and Scott W. McCaskill for Defendants and Respondents.

OPINION
NARES, Acting P. J.

This action involves a dispute between two factions for control of the Alta Del Mar Coastal Collection Community Association (the Association), a homeowner's association governing 10 homes. The trial court issued a temporary restraining order (TRO) that essentially barred Girish Prasad, a co-manager of plaintiffs LNSU #1, LLC (LNSU#1) and LNSU #2, LLC (LNSU#2) (together plaintiffs or the LLCs), from acting as a director on the Association's board of directors (the board). The ultimate question presented is whether Prasad is eligible to be a board member. The trial court also issued a preliminary injunction that barred plaintiffs from: (1) preventing other Association members from holding a special election to fill two vacancies on the board and (2) conducting any Association business other than ordinary day-to-day property maintenance or election preparations.

Plaintiffs appeal from both the TRO and preliminary injunction. As we shall explain, Prasad is not currently eligible to be a board member. Thus, the trial court did not err in issuing the TRO and we affirm that order. We dismiss the appeal from the preliminary injunction as moot.

FACTUAL AND PROCEDURAL BACKGROUND

The Association is a nonprofit mutual benefit association under the Davis–Stirling Common Interest Development Act (the Act) (Civ. Code, § 4000 et seq.). The Association consists of the record owner of each of 10 homes, which are governed by covenants, conditions and restrictions (CC&R's), articles, bylaws, and the Association's community handbook (the Handbook) (collectively the governing documents). The board consists of five directors. The Association hired Associated Professional Services (APS), and its employee, Therese McLaughlin, to provide bookkeeping and management services.

The LLCs are the legal owners of lots 5 and 6 in the development and are members of the Association. The LLCs have the same three managers: Ponani Sukumar, Doug Grimes and Prasad.

In June 20171 the Association held an election for three board members. The LLCs nominated Grimes—as the manager for LNSU#2—as a candidate. McLaughlin served as the as the “Inspector of Elections” for that election. Two of the existing directors, Sukumar and Anthony Valeri, were not up for reelection. Sukumar serves on the board on behalf of LNSU#1.

Doug Woelkers, Mark Brungger and Grimes received the most votes. McLaughlin subsequently determined that Grimes was not eligible to serve on the board because he was not a member of the Association. McLaughlin declared that Martin Mueller was elected to the board instead of Grimes.

The LLCs filed this action against the Association, APS and McLaughlin (collectively defendants) for declaratory and injunctive relief to install Grimes as a board member and remove Mueller. McLaughlin later issued a revised election report finding Grimes to be eligible and elected to the board. Around the same time, two of the newly elected board members, Woelkers and Brungger, resigned from the board.

Someone then drafted and circulated a “Petition for Special Election” to fill the two board vacancies. McLaughlin sent the signed petition to all homeowners in October. At this time, the three board members were Sukumar, Grimes and Valeri. Sukumar and Grimes claim that Valeri failed to appear at meetings and thus prevented a three-director quorum needed for most valid board actions.

On October 11, the LLCs filed an ex parte application for a TRO to: (1) compel defendants to disclose unprivileged matters discussed at a board meeting held on August 28, 2017; (2) enjoin defendants from holding closed meetings to discuss matters which are not properly discussed in closed sessions; and (3) enjoin defendants from holding a special election to fill board vacancies. At a special board meeting held on October 17 (the October meeting) Sukumar and Grimes appeared, but Valeri was absent. The minutes noted that “pressing matters” needed to be resolved and that Valeri's absence prevented a quorum. Additionally, Grimes and Sukumar found no members willing to be appointed to the board and that Prasad was the only member who had appeared at the meeting. Grimes asked Prasad if he was willing to serve on the board as a co-manager of member LNSU#1. Prasad agreed and was appointed to the board. The newly constituted board (Sukumar, Grimes, and Prasad, with Valeri absent) created a quorum. Among other things the board: (1) removed Valeri as president of the board, (2) appointed Grimes as president and CFO, (3) appointed Sukumar as vice president and secretary, and (4) authorized Grimes to “look for a replacement neutral legal counsel.”

On October 20, defendants opposed plaintiffs' application arguing that “immediate danger of irreparable harm to the Association and its members [existed] in relation to the multiple motions that were improperly passed at the [October] Meeting, as well as the threat of further non-authorized acts that Messieurs Grimes, Sukumar and Prasad may attempt to 'pass.' “ Defendants sought an injunction voiding any action of the board at the October meeting and barring Sukumar, Grimes and Prasad from conducting any Association business. Defendants also argued that the LLCs were improperly seeking to block a special election requested by Association members, not defendants.

On November 1, defendants filed an ex parte application to declare all actions taken at the October meeting void and enjoin the LLCs from taking any further action on behalf of the Association. The LLCs objected to defendants' request for a TRO on procedural grounds, arguing that defendants were improperly “hijack[ing] Plaintiffs' noticed ex parte hearing for their own purposes ....” and were “attempting an end run around the obvious requirements of filing and paying for a cross-complaint” claiming that defendants were seeking injunctive relief against Sukumar and Grimes who were not parties to the litigation. The LLCs claimed that under section 4.4.1 of the bylaws a board majority has the power to fill a board seat and, only if the board is unable to fill that seat may the members hold an election to fill any unfilled seat. The LLCs also asserted that defendants' “entire TRO Application relies upon its [improper] legal contention that [Prasad] was not lawfully appointed by the Board to fill a Director vacancy.”

In its reply, defendants argued that: (1) it did not need to file a cross-complaint because the LLCs initiated this action to adjudicate the claims of Grimes and Sukumar, (2) section 4.4.1 of the bylaws was unenforceable because it is contrary to the Corporations Code, and (3) Prasad is not eligible to serve on the board.

On November 9, the trial court held a hearing on the competing TRO requests. The court specifically asked the parties to address whether a special election should be held. The LLCs argued that Valeri refused to attend board meetings to prevent a quorum and that Grimes and Sukumar acted properly under the bylaws to appoint Prasad as a director. The LLCs thus claimed that a special election was not necessary because the board had already acted by appointing Prasad. The LLCs asked that that the court recognize the current board as proper and, contrary to their earlier statement, requested that the currently scheduled special election be held to fill a remaining board vacancy.

Defendants argued that Valeri did not boycott the October meeting; rather he had not been told about it and had been out of town. Defendants asserted that Prasad was not eligible to serve on the board and that any actions taken by the new board would be void. They argued that the Association members requested an election to select board directors, that after the election they would hopefully have five appropriate directors, that the court should allow the election to go forward and, in the interim, not allow the board to conduct anything but administrative business. Defendants asked to court to recognize that Prasad was not properly installed, that the board's actions at the October meeting was void, that a special election be held and that no other board business be conducted in the interim.

The trial court denied the LLCs' request for a TRO finding no risk of irreparable harm or a probability of success on the merits. It granted defendants' request for a TRO, indicating it was troubled by the LLCs owning two lots but having three directors on the board. Thus, in essence, the trial court determined Prasad ineligible to act as a director. The parties stipulated to a December 28 election to fill the two open board seats and the court set the matter for a hearing on a preliminary injunction.

The board held a special meeting on November 16 (the November meeting) attended by Sukumar, Grimes and Valeri. The minutes noted that a TRO prevented Prasad from acting as a director. At this meeting, among other things, Grimes and Sukumar acting as the board's majority declared that all Association officer positions had been vacant since June 22, appointed Grimes as president and CFO, and appointed Sukumar as vice president and secretary. Valeri voted “[n]o” on the three motions.

On November 27 the trial court issued a written order granting defendants a TRO that deemed void all the actions taken by Sukumar, Grimes and Prasad at the October meeting. On November 29 the trial court issued a preliminary injunction that stayed the appointment of Association officers and retention of new legal counsel as agreed at the November hearing. The order also barred the LLCs from: (1) preventing other Association members from holding the December 28 special election to fill two vacancies on the board and (2) conducting any Association business other than ordinary day-to-day property maintenance or election preparations.

The LLCs filed a petition for writ of mandate in this court seeking to stay the election. The writ petition focused on the LLCs contention that if the trial court wrongly invalidated the board's appointment of Prasad, that error would invalidate the upcoming special election. We summarily denied the petition.

At the December 28, 2018 election, the Association members elected Doug Woelkers and Roy Durham as directors. The LLCs timely appealed from the November 27 and 29 orders. Thereafter, the LLCs filed a petition for writ of supersedeas seeking stay on appeal of the order granting the preliminary injunction. The LLCs focused on the practical effect of the injunction which, among other things, prevented Prasad from acting as a director and denied them a board majority. We summarily denied the petition.

DISCUSSION

I. MOOTNESS

Plaintiffs appeal from the court's order granting the TRO and its subsequent order granting a preliminary injunction. Plaintiffs assert that the board properly appointed Prasad as a board director at the October meeting because Prasad met all eligibility requirements set forth in the governing documents. Plaintiffs further contend that the trial court erred by voiding all board actions at the November meeting, firing all Association officers and blocking access to legal counsel of the Association's choice.

Defendants argue that the entire appeal is moot and should be dismissed because the TRO was subsumed by the preliminary injunction and the preliminary injunction expired by its terms on January 21, 2018. Moreover, the special election that the plaintiffs sought to block occurred in December. In their reply, plaintiffs argue that reversal of the court's rulings would have a major impact on the Association as Grimes would be president, Prasad would be on the board and the December 28 election would have to be voided because it wrongly elected a director for a seat that had not been vacated. Even if the matter is moot, plaintiffs argue that, with few members interested in service on the board, questions regarding the right of its co-managers to serve on the board will continue into the future.

“An appeal should be dismissed as moot when the occurrence of events renders it impossible for the appellate court to grant appellant any effective relief.” (Cucamongans United for Reasonable Expansion v. City of Rancho Cucamonga (2000) 82 Cal.App.4th 473, 479.) “Notwithstanding [the mootness doctrine], there are three discretionary exceptions to the rules regarding mootness: (1) when the case presents an issue of broad public interest that is likely to recur [citation]; (2) when there may be a recurrence of the controversy between the parties [citation]; and (3) when a material question remains for the court's determination.” (Id. at pp. 479-480.)

Here, despite expiration of the TRO, the question whether Prasad is eligible to act as a board director is the primary issue presented in this appeal. As plaintiffs note, this issue is reasonably capable of recurring. Accordingly, we exercise our inherent discretion to address it. (See Conservatorship of Joseph W. (2011) 199 Cal.App.4th 953, 961.)

We dismiss as moot plaintiffs' appeal from the preliminary injunction. The preliminary injunction stayed the appointment of officers and the retention of new counsel, and restrained plaintiffs from preventing the special election to fill two board vacancies. The preliminary injunction expired on January 21, 2018. Additionally, the special election has occurred. The occurrence of these events renders it impossible for us to grant plaintiffs any effective relief regarding this order.

II. PROCEDURAL ISSUES

Under a primary heading proclaiming that the trial court erred in removing a lawfully appointed board director by injunction, plaintiffs raise six procedural issues that they claim warrant reversal of the trial court's orders. Under separate subheadings, plaintiffs argue: (1) the board properly appointed Prasad as a director; (2) a director cannot be removed by injunction; (3) the LNSU homeowners have nothing to do with the acts enjoined; (4) Code of Civil Procedure section 526, subdivision (b)(6) prohibits removing a board director by injunction; (5) the trial court erred using injunctive relief to address a past act; and (6) Prasad's ineligibility to be a director is not supported by the Association's governing documents. In their reply, plaintiffs argue that the unique posture of this case raises serious procedural issues that must be resolved.

We agree that the procedural posture of this case is unique. Plaintiffs initially filed this action to determine whether Grimes had been properly elected as a director. Once this issue resolved, the board appointed Prasad as a director and the primary focus of the litigation changed to whether a board majority properly appointed Prasad and whether Prasad was eligible to serve as a director.

Defendants submitted these issues to the trial court by requesting a TRO, arguing that immediate danger of irreparable harm existed to the Association. Plaintiffs argued that Grimes's installation on the board did not moot its request for injunctive relief and that such relief was necessary because defendants were preventing the board from functioning. Plaintiffs raised procedural objections to defendants' request, while recognizing that defendants' arguments rested on the contention that Prasad had not been lawfully appointed to the board. Plaintiffs' argued that: (1) defendants failed to obtain a hearing date for their ex parte application and were improperly “hijack[ing]” plaintiffs' hearing; and (2) defendants are seeking injunctive relief against Sukumar and Grimes, non-parties to the litigation, without filing a cross-complaint.

As a general rule, we do not consider arguments made for the first time on appeal and deem such arguments forfeited. (Professional Collection Consultants v. Lauron (2017) 8 Cal.App.5th 958, 972.) We conclude that plaintiffs forfeited the following arguments by failing to raise them below: (1) a director cannot be removed by injunction; (2) the LNSU homeowners have nothing to do with the acts enjoined; (3) Code of Civil Procedure section 526, subdivision (b)(6) prohibits removing a board director by injunction; and (4) the trial court erred using injunctive relief to address a past act.

As we shall explain, we need not address the merits of plaintiffs' remaining argument that the board properly appointed Prasad as a director and reject their argument that the Association's governing documents establish Prasad's eligibility to serve as a director. (Post, pt. III.)

During oral argument, plaintiffs asserted that to properly challenge Prasad's appointment to the board the defendants needed to undertake internal dispute resolution, go to alternative dispute resolution, and then someone needed to file a lawsuit. For purposes of appeal, we assume, without deciding, that the board acted properly in appointing Prasad as a director. This assumption leaves the seminal question whether Prasad is eligible to be a director. The trial court effectively decided that Prasad was not eligible to be a director when it issued an injunction preventing Prasad from acting as a director.

At the hearing on the competing TRO requests, the trial court stated that it had read everything and informed the parties that it would grant a TRO, “That's for darn sure. Okay?” Plaintiffs' argued that the board properly appointed Prasad and that Prasad was eligible to be a director. Defendants claimed that the court did not need to reach the issue whether the board properly appointed Prasad because Prasad was not eligible to be a director. Defendants argued that because Prasad was not eligible to be a director, all actions by “this new board, they're all invalid and void.”

After hearing argument from both parties, the trial court asked plaintiffs' counsel, “So tell me exactly what you want, Counsel.” Plaintiffs' counsel responded, “I want the Court to recognize the board as properly constituted ... as Mr. Sukumar, Mr. Grimes, Mr. Valeri, and Mr. Prasad. That way we can have a functioning board, even with or without Mr. Valeri deciding he's not going to show up. We can have a quorum act, which is why Mr. Prasad was put on [the board] in the first place.” Defendants asked the court to recognize that Prasad had not been properly installed as a director and that any action by the board after Prasad's appointment is void. Plaintiffs did not voice any procedural objections at this hearing.

This record establishes that the parties placed Prasad's eligibility to be a director squarely before the court. Plaintiffs cannot now argue that the trial court erred in deciding this issue. Rather, “[f]rom their creation by article VI, section 1 of the California Constitution, California courts received broad inherent power 'not confined by or dependent on statute.' [Citations.] This inherent power includes 'fundamental inherent equity, supervisory, and administrative powers, as well as inherent power to control litigation.' “ (Stephen Slesinger, Inc. v. Walt Disney Co. (2007) 155 Cal.App.4th 736, 758.) “[A] court has both the inherent authority and responsibility to fairly and efficiently administer all of the judicial proceedings that are pending before it, and that one important element of a court's inherent judicial authority in this regard is 'the power ... to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.' “ (People v. Engram (2010) 50 Cal.4th 1131, 1146.)

Here, the court properly acted under its inherent authority to decide an issue that all parties agreed needed to be resolved. Accordingly, we reject plaintiffs' argument that the court's orders must be reversed on procedural grounds.

III. PRASAD IS NOT CURRENTLY ELIGIBLE TO SERVE ON THE BOARD

By preventing Prasad from acting as a board member the trial court rejected plaintiffs' argument that Prasad was eligible to serve on the board. Plaintiffs contend that the trial court erred because the governing documents establish Prasad's eligibility to serve on the board. Plaintiffs argue that no case authority prohibits two co-managers of a single member from serving on the board as long as they are not residing in the same household. Because only co-residents of one household are ineligible to serve together, and defendants did not prove that Prasad was a resident at any of LNSU's Association properties, plaintiffs contend that the court's ruling constituted reversible substantive legal error.

As we will explain, the parties erroneously focus on a provision in the Handbook governing the election of board members.2 Review of all the governing documents establishes that Prasad is not currently eligible to serve on the board because the LLCs are the members of the Association eligible to serve on the board and LNSU#1 and LNSU#2 are both currently serving on the board through their respective agents, Sukumar and Grimes.

As a preliminary matter it must be recognized that an LLC “ ' “is a hybrid business entity formed under the Corporations Code” ' “ that consists of at least two members and “ ' “has a legal existence separate from its members.” ' “ (Western Surety Co. v. La Cumbre Office Partners, LLC (2017) 8 Cal.App.5th 125, 131 (Western).) The management of an LLC may be vested in the company's members, making each member of the LLC an agent of the LLC for the purpose of its business or affairs. (Ibid.) Here, the undisputed facts show that Sukumar, Grimes and Prasad are each co-managers of LNSU#1 and LNSU#2.

The Handbook provides that only a “member in good standing” may run for the board of directors. Additionally, the Bylaws specify that board “directors must be Members of the Association.” The CC&R's define a “Member” as “every Person who holds a membership in the Association.” The CC&R's also provide that membership in the Association is obtained only through ownership of a residential lot and that “ '[o]wner' means the record owner, whether one or more Persons.” A “ 'Person' means a natural person or any legal entity recognized under California law. When the word 'person' is not capitalized, the word refers only to natural persons.”

Applying these definitions to the undisputed facts, Sukumar, Grimes and Prasad, the three co-managers of each LLC, are not owners of the lots in their individual capacities and are not eligible to act as a board member in their individual capacities. The LLCs, as the record owners of the two residential lots and members of the Association, are eligible to serve on the board. An LLC cannot act as a director in its corporate form, but may act as a director through its agents as natural persons, whose actions are deemed the actions of the LLC. (Western, supra, 8 Cal.App.5th at p. 131.)

LNSU#1 and LNSU#2 are currently acting as board directors through their agents, Sukumar and Grimes. Thus, for Prasad to be a director, he must to do so as an agent of LNSU#1 or LNSU#2, but both entities are already directors through their agents. The problem with Prasad serving as a director is not that he was a “resident of the same household” as one of his business partners. Rather, only the LLCs are eligible to serve on the board, and both LLCs are already serving on the board through their agents.

Accordingly, based on the language of the governing documents and the undisputed facts, the trial court correctly ruled that Prasad was not currently eligible to serve on the board. (Blue Chip Enterprises, Inc. v. Brentwood Sav. & Loan Assn. (1977) 71 Cal.App.3d 706, 712 [“[W]e review the trial court's order, not its reasoning, and affirm an order if it is correct on any theory apparent from the record.”].) Because Prasad is not currently eligible to be a director, the trial court did not err by voiding all actions taken by Sukumar, Grimes and Prasad at the October meeting.

DISPOSITION

The temporary restraining order is affirmed. The appeal from the preliminary injunction is dismissed as moot. Respondents are entitled to their costs on appeal.

WE CONCUR:

IRION, J.

DATO, J.

Footnotes

1. Undesignated date references are to 2017.

2. The Handbook provides eligibility requirements for candidates wishing to serve on the board, including that: “[t]wo residents of the same household may not serve on the Board at any one time” and “[t]he candidate may not be involved in a lawsuit with the Association.”

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