By Bradley Schuber, Esq. 

In a recent case titled Doug Ridley, et al., v. Rancho Palma Grande Homeowners Association, et al., 2025 WL 2775672, a California court found that a homeowners association failed to conduct a reasonable investigation into the existence of an underground well and acted in bad faith. As a result, the plaintiffs in this case received a $1.8 million judgment for water damage, lost rent, emotional distress, and punitive damages.

Doug Ridley and Sherry Shen owned and rented a condominium unit (the “Unit”) in Santa Clara County. The Unit was part of a common interest development with over 100 units and managed by the Rancho Palma Grande Homeowners Association (“HOA”). Under the CC&Rs, the HOA was responsible for managing, operating, maintaining, caring for, and preserving the common areas of the Rancho Palma Grande development.

In April 2018, the tenants living in the Unit reported flooding in the crawlspace. Since the crawlspace was technically part of the common area, the report of flooding was communicated to the HOA, which was responsible for investigating the source of the water intrusion and fixing it in accordance with the CC&Rs.

Preliminary investigations by the HOA into the cause of the flooding in the crawlspace strongly indicated that the water was coming from an underground well. For example, in May 2018, the HOA, through its retained counsel, contacted the City and the Santa Clara Valley Water District to inquire about potential funding for remediation of the water. In response, the Water District reported that it believed that the water was from "an unknown, unregistered well." The Water District provided the HOA with a map indicating the likely location of an abandoned but undestroyed well from a previously existing farm on the land. Additionally, three drilling contractors confirmed that there was likely an undestroyed well underneath or near the Unit.

However, the HOA chose to dismiss these initial findings. Instead, they sought an opinion from a hydrologist who, without prior knowledge of the well's existence, recommended installing a French drain to remove water from beneath the crawlspace. The cost of installing the French drain was significantly lower than searching for and repairing an underground well. Ultimately, the French drain proved ineffective, resulting in mold and termite infestations in the crawlspace, which made the unit uninhabitable. In January 2020, workers attempting to fill a sinkhole in the crawlspace accidentally uncovered a well cover beneath the living room of the unit. Ultimately, this led to the discovery of an abandoned well over 400 feet deep.

In rendering its decision and holding the HOA liable, the court found that the HOA had ignored several consistent recommendations regarding the likelihood of an underground well existing, resulting in an incomplete investigation and a failure to properly identify, address, and make meaningful repairs for over a year and a half. The court held that the HOA was not protected by the business judgment rule or judicial deference, as it had failed to conduct a reasonable investigation and had not acted in good faith.

The HOA appealed the case to the California Court of Appeals, Sixth Appellate District; however, it upheld the trial court's decision that the HOA breached its duties under the CC&Rs by failing to reasonably investigate and promptly repair the damage in the common area. The appellate court also upheld the lower court's findings that the HOA's actions amounted to gross negligence. In addition to the $1.8 million judgment noted above, the homeowners were also awarded over $6 million in legal fees and costs. In making its decision about fees and costs, the trial court quoted from a California appellate decision: “An award of attorneys' fees is not a gift… it is just compensation for expenses actually incurred in vindicating the public right.”

This case should serve as a reminder that California homeowner associations must conduct thorough investigations into repairs. It also highlights that the protections provided by the business judgment rule and judicial deference do not apply if a finding of bad faith is made. While board members can and should rely on expert opinions to fulfill their duty of care, they must not ignore, misrepresent, or conceal important information related to the maintenance and repair obligations of a homeowner association.