LAKE ARROWHEAD CHALETS TIMESHARE OWNERS v. LAKE ARROWHEAD CHALETS OWNERS
(1996) 51 Cal.App.4th 1403
[Opinion certified for partial publication. fn. * ]
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
time-share facilities. The time-share 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 time-share 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was rescinded, (3) damages against Hanneman and Genn for alleged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, [51 Cal.App.4th 1406] 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
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
The plaintiffs appeal from the judgment against them. The defendants
cross-appeal from the denial of their motion for attorney's fees.
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 [51 Cal.App.4th 1407] for
an award of attorney's fees on appeal, pursuant to Code of Civil
Procedure section 907 and California Rules of Court, rule 26.
A. , B. fn. ***
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 time-share 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 time-share 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
Subdivision (b) of Corporations Code section 7150 establishes certain
restrictions on the powers of a mutual benefit corporation's members to
amend its bylaws. fn. 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 [51 Cal.App.4th 1408]
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 time-share 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 time-share class. Prior to the amendment, the time-share
members of the association, though owners of a minority of the units,
had the chance to elect a majority of the board of directors. fn. 4
After the division of the membership into two classes, only the
whole-unit owners had that opportunity. Thereafter, the time-share
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
time-share owners, arguing that in fact the change benefited the
time-share 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 time-share owners) to
control the board. Thus, we [51 Cal.App.4th 1409] cannot say as a matter of law that the effect of the amendment were entirely beneficial to the time-share owners. fn. 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 time-share 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. fn. ***
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.
Hollenhorst Acting P. J., and Ward J., concurred.
Pursuant to California Rules of Court, rules 976(b) and 976.1, this
opinion is certified for publication with the exception of parts A, B,
Judge of the San Bernardino Municipal Court, East Division, assigned by
the Chief Justice pursuant to article VI, section 6 of the California
FN *. See footnote, ante, page 1403.
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.
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 time-share unit owners participated in the election and
voted cumulatively for 4 candidates, each candidate would receive 42
votes (24 X 7 ö 4). If the eight whole-unit owners who attended also
voted cumulatively for four candidates, each would receive only fourteen
votes. Under the old system, therefore, the time-share 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.
Indeed, if the amendment were entirely beneficial to the time-share
owners and adverse to the whole-unit owners, one would be hard pressed
to explain why the time-share 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.
FN *. See footnote, ante, page 1403.