This month, the California Second District Court of Appeal (“Court”) stopped short of prohibiting a common interest development owners association (“Association”) from recovering a portion of surplus proceeds following a nonjudicial foreclosure sale of an Association member’s townhome (“Unit”) where the Association had a recorded financial interest in the Unit.
In Cruz v. Valerio Townhomes Homeowners Association (an appeal from Los Angeles County Super. Ct. No. LS030053), appellant and former Unit owner Cruz defaulted on her mortgage and the property was sold in a nonjudicial foreclosure sale. The sales proceeds exceeded the balance due on the loan, prompting the trustee to give notice of the surplus to all persons with a recorded interest in the Unit. Respondent Association filed a claim with the trustee for a portion of the surplus proceeds. Because Cruz disputed the Association’s claim, the trial court conducted a bench trial on the issue. The trial court entered judgment in favor of the Association and ordered the distribution of $94,873.97 to the Association and the remaining surplus of $20,639.98 to Cruz.
At the heart of this dispute was the validity and enforceability of a lien recorded against the Unit for unpaid assessments in late 2014. Cruz contended the Association’s claim was “full of over-billed dues and unearned and bogus fees” and not in compliance with the requirements of the Davis-Stirling Act (“Act”), the body of law governing residential common interest developments in California.
In 2015, the Association attempted to foreclose on the lien. However, a few days prior to the noticed foreclosure sale, Cruz filed a Chapter 13 bankruptcy petition, preventing the sale.
In the trial court’s tentative statement of decision, it ruled the Association had failed to establish a legally valid lien. Specifically, the Association failed to establish compliance with three (3) parts of the Act: (i) the pre-lien notice; (ii) the notice of recordation of the lien; and (iii) a legally binding vote by the Association board to record the lien. Accordingly, the trial court’s preliminary ruling held that the Association was not entitled to any surplus proceeds from the sale of the Unit.
The Association objected, requesting the trial court to recognize and consider relevant documents from Cruz’s bankruptcy case: the Association’s proof of claim for the lien and the Case Summary and Claims Register, which evidenced that Cruz failed to file an objection to the Association’s proof of claim.
The Association argued that Cruz’s failure to challenge the validity of the lien by objecting to the proof of claim in her bankruptcy case resulted in the claim being deemed allowed. The Association further contended that an allowed claim is in the nature of a final judgment and thus the principle of res judicata precluded the trial court from considering the lien’s validity.
After further consideration of the Association’s argument, the trial court changed course, ruling that under res judicata, the Association’s unchallenged claim was tantamount to a final judgement. Consequently, the trial court determined it did not have the ability to reconsider the validity of the lien.
On appeal, Cruz attacked the Association’s arguments on dueling fronts: (i) the Association had waived any res judicata argument as to the validity of the lien because the Association presented independent evidence in support of the lien’s validity apart from its res judicata defense; and (ii) that collateral estoppel or issue preclusion (i.e., res judicata) did not apply in the subject case.
Both arguments put forth by Cruz were rejected by the Court, which affirmed the trial court ruling.
Waiver of Res Judicata
The Court disagreed with Cruz’s waiver position, pointing out, “waiver is the intentional relinquishment of a known right after knowledge of the facts. The burden … is on the party claiming a waiver of a right to prove it by clear and convincing evidence … and doubtful cases will be decided against a waiver. The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right.” Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.
The Court continued, “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Waller, supra, at pp. 33–34. “The pivotal issue in a claim of waiver is the intention of the party who allegedly relinquished the known legal right.” DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 60.
Inapplicability of Res Judicata
The Court – correctly – began its analysis by recognizing that even where all three (3) required elements of res judicata (as described in footnote 2) have been satisfied, the Court has repeatedly looked to the public policies underlying the doctrine before concluding whether res judicata should be applied in a particular setting. Lucido v. Superior Court (1990) 51 Cal.3d 335, 342–343.
Homing in on the relevant federal bankruptcy statute, the Court cited title 11 of United States Code section 502, subdivision (a), which states a “claim or interest, proof of which is filed under section 501 of this title …, is deemed allowed, unless a party in interest … objects.” (Emphasis added) Further, the allowance or disallowance of “a claim in bankruptcy is binding and conclusive on all parties or their privies, and being in the nature of a final judgment, furnishes a basis for a plea of res judicata.” Siegel v. Fed. Home Loan Mortg. Corp. (1998) 143 F.3d 525, 529. Put simply, California courts must give full faith and credit to a final order or judgment of a federal court. Levy v. Cohen (1977) 19 Cal.3d 165, 172.
Because Cruz did not object in bankruptcy court to the Association’s proof of claim concerning the subject lien, the claim was deemed allowed. 11 U.S.C. § 502(a). Even if a bankruptcy case were later dismissed – as was the case in Cruz – the result would be the same. As the Court noted, the validity of the subject lien was established when the Association filed a proof of claim in Cruz’s bankruptcy case and Cruz failed to object. 11 U.S.C. § 502(a); Siegel, supra, at p. 529.
Owners’ associations throughout California should therefore not be deterred from enforcing lien rights against a delinquent member who has declared bankruptcy, and would be wise to promptly lodge a proof of claim at the outset of such proceedings to protect its financial interests against delinquent members.
 While Cruz is an unpublished opinion, it gives valuable insight on how future courts might deal with similar issues.
 The doctrine of res judicata gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy. The required elements for applying this doctrine to either an entire cause of action or one or more issues are the same: (i) a claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (ii) the prior proceeding resulted in a final judgment on the merits; and (iii) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding. People v. Barragan (2004) 32 Cal.4th 236, 252–253; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.
Authored by Reuben, Junius & Rose, LLP Attorney Michael Corbett.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.