Davis-Stirling Condo Law by Adrian Adams

QUESTION: We have underground parking which makes it expensive to retrofit anything. A resident wants the HOA to supply power to his parking space so he can install a charging station for his car. He claims the electric draw is less than a hair dryer (not sure I believe that). As more people buy electric vehicles and tap into the association’s electrical panels, at some point we will have circuit breaker issues. What happens then?

ANSWER: Your owner has the right to run power to his parking space. Civil Code §1353.9(f). However, he must do so at his own expense. The association is not required to subsidize the cost.

Who Installs? Installing circuit breakers, conduit and wiring from the association’s electrical panel to the parking space can either be done by the association and billed to the owner or it can be done by the owner. Who does the work depends on how much control the association wants over the installation. Electricians who work for homeowners sometimes take shortcuts and jury rig their installations. Highrise condominiums often prefer that all common area electrical work be done by the association’s electrician. Otherwise, the homeowner’s electrician can install electrical upgrades provided he is licensed and insured and the work is signed off by the association’s architectural committee and the city/county building department.

Overloading the Panel. If the common area electrical panel cannot handle the extra load created by the charging station, the panel will need to be upgraded. All costs associated with the upgrade are at the requesting owner’s expense.

RECOMMENDATION: Boards should work with legal counsel to make sure appropriate agreements are signed by the homeowner and covenants recorded prior to the start of work.

If your company specializes in providing quality services to community associations, we are offering an opportunity for you to reach out to association boards and managers throughout California.

We will allow up to three companies to place banner ads on the front page of the Davis-Stirling.com website. We have over 330,000 visits to our website and two million page-views per year. If you are interested or know a company who would benefit, contact Nathalie Ross at (800) 464-2817 or send an email.

Good news! This past week, the Assembly Judiciary Committee approved AB 2273 by a vote of 8 to 1. The bill now moves to the Assembly floor in the next 2-3 weeks. Skip Daum, CAI’s legislative advocate for this bill, reported that more than 1,000 letters were received in support of the bill. Thank you to everyone who sent letters. Your efforts are paying off.

Purpose of Bill. The bill requires banks to record foreclosure deeds within 30 days so associations know who and where to bill for assessments. It makes banks accountable for the properties they acquire. As expected, the lending industry is strenuously lobbying against the bill.

Radio Interview. I was interviewed by Peter Jon Shuler of KQED Public Radio earlier this week. Click here to listen to the interview about this important legislation.

REMINDER: For those who want to attend, I will be participating in a webinar with reserve specialist Robert Nordlund presenting the legal side of reserve studies. The webinar is open to everyone with an interest in the subject.

Sign-Up. Select a time and then sign-up by clicking on one of the following links: Tuesday, May 15th at 11am (2:00 p.m. EST) or Tuesday, May 15th at 1:30pm (4:30 p.m. EST).

The Job Market portion of our website has suddenly received a lot of listings. That is an encouraging sign that the economy might be loosening a bit.

If your association or management company is looking for people to hire, the Job Market is free and provides a good avenue for you to quickly reach qualified individuals.

JOB ALERT. To speed the process of connecting employers and candidates, we added a “Job Alert” that automatically sends an email to candidates whenever jobs are posted.

Nuisance Politics #1. I noticed you did not mention how much Mitt Romney was going to spend on his campaign. -Laura B.

RESPONSE: The information about spending came from Public Radio International. The report did not include any estimates on how much Romney would spend. If it did, I would have included it. The report did, however, project spending for all races nationwide, which I added. The numbers are staggering. This important election cycle will be quite intrusive.

Nuisance Politics #2. I wanted to thank you for taking the time to devote a portion of your weekly newsletter to political campaigning. You are right, we are in an “election year.” And I feel that the 2012 Presidential election is going to be quite critical. I happen to be a third generation political activist, so I always encourage everyone to get out and vote. My grandmother was the first woman to run for congress in Pennsylvania during the Great Depression. My niece Lindsay is carrying on the family tradition, she’s the campaign manager for California State Assemblywoman Betsy Butler and you bet I’m proud of her! I always enjoy your take on Davis-Stirling issues. Keep up the good work! -Ellen M.

RESPONSE: Thank you Ellen. You have good reason to be proud. Go Betsy Butler! (Oops, that might be viewed as political.)

Nuisance Politics #3. Can any member in good standing request a copy of the membership list with all pertinent information that management has such as address, phone, email? I realize they probably will want to charge for the cost of producing it. -David A.

RESPONSE: Any member, whether in good standing or not, can inspect and copy the membership list. Members do not have a right to phone numbers, and their right to email addresses is uncertain. Associations can bill the requesting member for direct and actual cost of copying the membership list. Civ. Code §1365.2(b). Any person who misuses a membership list is liable for any damage caused by the misuse, including punitive damages for a fraudulent or malicious misuse. Corp. Code §8338(b).

Nuisance Politics #4. Do you recommend that the prohibition of fliers door-to-door and posting of fliers in the common ares be in the association’s governing documents? -Patsy O.

RESPONSE: When you say “governing documents,” that covers CC&Rs, Articles of Incorporation, Bylaws, Rules & Regulations, etc. Adding a restriction to your Rules is sufficient. The board must give proper notice before doing so.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

“Legal solutions through knowledge, insight and experience.” When your association needs legal assistance, contact us at (800) 464-2817 or info@adamskessler.com.

QUESTION: We live in a security complex and we have a “No Solicitors” sign posted in the front of the building. Somehow political canvassers and campaigners are still entering our complex. Because it’s political, do we have to allow them in the building?

ANSWER: No you don’t have to let them in. What you are experiencing is going to get worse as we get closer to the November election. The political cycle this year will be the most expensive in history. Barack Obama’s 2008 presidential campaign broke all records when he spent $760 million to get elected. His re-election campaign will shatter that record with a projected $1 billion this year. Overall spending by all candidates nationwide is projected to be an astounding $7 billion. On top of that will be significant spending on California propositions seeking to raise our taxes (because Sacramento does such a good job spending our money). The advertising will be relentless.

Nuisance Campaigning. In addition to political advertising on billboards, radio and television, voters will be subjected to telephone calls, fliers, and knocks on the door. Associations will receive requests to use common area facilities for political organizing and for meeting candidates running in state and local races. Finally, there may be requests for the association’s membership list which could be turned over to political organizations for email blasts and money solicitations. The political wave will hit like a tsunami.

Association Response. Most homeowners will want their associations to shield them from the pervasive and intrusive political noise. Associations can buffer residents from some of the intrusion but all.

1. Fliers & Solicitation. Associations can prohibit door-to-door solicitors and the distribution of fliers, provided the development has restricted access. Developments that are freely and openly accessible to the public cannot prohibit leafleting, solicitations, and fliers. Golden Gateway v. Golden Gateway. The distribution of fliers door-to-door by residents and the posting of fliers in the common areas can be prohibited and appropriate fines levied. 

2. Meetings. Meetings in the common areas can be regulated. Typically, associations require a cleaning/damage deposit and a restriction on the number of outside guests. Most HOAs also charge a fee for reserving facilities for events. Fees for non-HOA political activities do not violate the “free access” requirement related to board elections. 

3. Membership List. Members can be notified that they can opt out of the membership list. In addition, associations can adopt rules for misuse of the membership list. One association we represent has a fine not just on the list itself but on every name on the list. That means that instead of a $500 penalty for misuse of the list, it’s a $500 fine multiplied by the number of names on the list.
   

RECOMMENDATION: Associations can, but are not required to, set aside one or more bulletin boards where residents can post business cards, announcements, and fliers. When it comes to door-to-door fliers and misuse of membership lists, boards should adopt rules now so they’re in place before the mayhem starts. Then, in November, everyone should get out and vote for a candidate who can fix the economy.

The lending industry is strenuously lobbying against AB 2273–the bill that would require banks to record their foreclosure deeds within 30 days and start paying association dues.

As reported last week, the bill was unanimously approved by the Assembly Housing & Community Development Committee due in large part to the 550 letters sent by you to the Committee.

The Assembly Judiciary Committee Hearing is scheduled for Tuesday morning. Please sign the suggested letter and fax it ASAP to (916) 772-3781. Letters that arrive by NOON on Monday will be delivered to Committee members.

For those who want to attend, I will be participating in a webinar with reserve specialist Robert Nordlund presenting the legal side of reserve studies. The webinar is designed for board members, managers and homeowners but is open to everyone with an interest in the subject. Some of the topics covered are:

• Do you need to follow your reserve study?
• Who controls what appears in it?
• Do national reserve study standards conflict with state law?
• What are the board member and Manager roles?
• What are potential legal liabilities surrounding reserves?

The live 45-minute webinar will be held at two different times on Tuesday May 15 so as to accommodate everyone’s schedule. You can sign up by clicking on one of the following links:

Tuesday, May 15th at 11am PDT (2pm EST)
Tuesday, May 15th at 1:30pm PDT (4:30pm EST)

Rogue Treasurer #1. The association with the rogue treasurer–sounds like they need you as their attorney!!! -Your Mother

RESPONSE: Thanks Mom.

Rogue Treasurer #2. Once you remove the rogue treasurer, one of the first things to do is notify the bank as well. You don’t want this “rogue” remaining on any of the accounts, or having access to on-line transactions. -Kerri H.

Rogue Treasurer #3. Thank you for your “Rogue Treasurer” item. It occurred to me that the board should dig deeper and see if there is any embezzlement or fraud involved. -Sam D.

Poo/Spa Cover. The Santa Clara County Health Dept. requires a floating spa cover to be removed in the morning when the spa area opens and stored in an area away from the spa. It can be replaced at the end of the day when the spa area is closed. I found a child in the spa under the cover while the parent sat and watched! -Linda S.

AB 2273. Skip Daum does great work. I hope that Jerry Brown appreciates common interest communities and their needs; he worries me a bit. -Marilyn B.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

QUESTION: We have a director who is under the impression he is the only one who can sign checks because he is the treasurer. Without board approval, he has called special meetings of vendors, refused to pay vendors and has even torn up a large check in front of a vendor. He has told vendors that he will refuse to sign any more checks until they do what he wants. They now refuse to work. This is creating chaos for the association. The treasurer threatened to file a lawsuit if anyone tries to remove him from office. What can we do?

ANSWER: Your treasurer is acting outside his scope of authority. Treasurers do not have unchecked power over the association’s finances. They answer to the board. Treasurers do not have the right to threaten vendors and tear up checks nor do they have sole authority to sign checks.

Duty to Sign Checks. If the board authorizes payment to a vendor, the treasurer has a duty to pay the vendor. He cannot withhold funds just because he disagrees with the board’s decision. If cash flow is a problem, the treasurer can put a temporary hold on a check until funds become available. If the treasurer (or any other director) discovers circumstances that would cause the board to reconsider payment to a vendor, that director should bring the matter to the attention of the board. Absent that, the treasurer must pay the association’s bills.

Removal from Office. The treasurer holds his office at the pleasure of the board and can be removed by the board at any time with or without cause. Removing your treasurer from office is not by itself sufficient cause for him to file a lawsuit. That does not mean he won’t sue. If he does, he is going to have a very difficult time explaining to a court why he should be reinstated since the appointment of officers is discretionary with the board (unless your governing documents state otherwise). If your treasurer is foolish enough to file a lawsuit, he would be open to a counterclaim for any damage he caused the association for his unauthorized actions as treasurer.

RECOMMENDATION: If the board remains silent, it could be seen as an endorsement of your treasurer’s bad behavior. That could put the association at risk for litigation from vendors. You should work with your attorney to create a paper trail of written demands that your treasurer cease acting outside the scope of his authority. If he refuses to fall into line, remove him from office. If you’ve already made written demands which he has ignored, immediately remove him from office.

QUESTION: A board member has volunteered to watch children at the swimming pool. She has encouraged other volunteers to do the same. Although I commend her volunteerism, I am concerned she is subjecting the association and herself to potential liability.

ANSWER: There is always potential liability whenever volunteers are involved in any HOA activity. If volunteers watch the kids and a child drowns, the lawsuit would say something to the effect that, “The association had volunteers watching my children and, but for their negligence, my child would not have drowned.” However, forbidding people from volunteering has its own risks. In the event a child drowns, the lawsuit would now read: “My child would not have drowned if you had not forbidden people from volunteering to watch him!“

Business Decision. As you can see, lawyers can spin a tragedy any way they want. Since you can’t entirely insulate yourself from potential litigation, the board must make a business decision as to which course of action produces the least risk. If children are out of control and there is a foreseeable risk of injury, allowing volunteers to monitor the pool may be the better course of action because it lowers the risk level. You would still want signage for “No Lifeguard on Duty” and disclaimers in your newsletters that parents must provide responsible supervision of their children at the pool.

RECOMMENDATION: Work with your insurance agent and your association’s legal counsel on this issue. The association is in a much better position to defend itself if it can show that the pool is regularly inspected and maintained, that all safety equipment is in place, that proper signage is posted, and that rules are enforced. If you opt for volunteers to help in that effort, you should make sure they are covered by the association’s insurance.

Thank you to everyone who wrote letters in support of AB 2273. This is the bill that requires recordation of foreclosure sales within 30 days so associations can timely receive assessments from the new owner.

On Wednesday morning, the Assembly Housing & Community Development Committee, on a unanimous bipartisan vote of 7-0, passed AB 2273 out of Committee.

CAI’s Legislative Advocate, Skip Daum, gives great credit to the more than 550 persons who wrote letters to the Housing Committee in support of the bill. The bill now passes to the Assembly Judiciary Committee for another hearing as early as next week. We will keep you informed of the bill’s progress.

Pool Covers #1. I concur with the comments from Socher Insurance. The main objective is to have a good risk management handle on pools and pool covers. -Carol Fulton, LaBarre/Oksnee Insurance Agency

Pool Covers #2. Insurance companies sometimes impose prohibitions or requirements which are not based on law, but those who require more than the law does tend to be in the minority–so shopping tends to cure that problem. -Tony Verreos, Verreos Insurance Agency

Pool Covers #3. Great info on pool covers. We come across them from time-to-time when conducting reserve studies. -Les Weinberg, Reserve Studies Inc.

Pool Covers #4. I found this information most helpful. I am wondering if the same would be true of a spa cover? Many spas use a floating bubble type cover which is lightweight and easily removed and reinstalled. They can be rolled up when not in use and stored on the pool deck near the spa. These bubble type covers will not support the weight of a child, though most spas are not open to children. I would appreciate any further information you may have. -Diane R.

RESPONSE: The same rules for floating pool covers likely apply to floating spa covers. Check with the agency that oversees pools and spas in your county and then diligently follow their regulations.

PERSONAL NOTE: Friday I played in the annual CAI Coachella Valley Golf Tournament in Palm Springs. My team was terrific and the weather perfect. I think I could get used to playing golf. -Adrian Adams

“Legal solutions through knowledge, insight and experience.” When your association needs legal assistance, contact us at (800) 464-2817 or info@adamskessler.com.

I received a number of comments about pool covers. Following are a few:

#1. Last week a reader recommended pool covers but I believe an association cannot use covers for their pools–only individual homeowners. -Dan F.

#2. California doesn’t allow HOAs to have pool covers because our pools are considered commercial. Please tell me I’m wrong. -Sam M.

#3. Regarding pool covers saving costs, what if your insurance agent requests that the association NOT use a pool cover for liability reasons? -Ann H.

RESPONSE: Jeff Theders, President of Aquatic Balance, Inc. steered me to information about tracked, anchored and floating pool covers–each with different safety regulations. “Floating covers” seem to cause the most concern. Since they are designed to float on the water, they can collapse under the weight of a child, allowing the child to become trapped under the cover and drown. As a result, pool covers are regulated.

Regulations. Orange County, for example, allows floating pool covers under the following conditions:

• The pool must be segregated from all dwelling units by an approved fence or enclosure.
• The pool is under the supervision of responsible persons who have sole access to the pool area when it is not open for use. The pool area must be locked to prevent any usage of the pool when the cover is placed on the pool water. The pool may not be reopened for use until the responsible person removes the pool cover and properly stores it.
• The pool cover, when not in use, must be rolled up and stored at least four (4) feet from the pool (see informational bulletin).
  

Associations with pool covers should check the regulations in their own counties.

Insurance Issues. Patrick Lyons, Operations Manager for Socher Insurance reported that none of the carriers he contacted have ever had any issues with pool covers. Insurance carriers are concerned with pool safety and that includes making sure pool covers are properly installed and regulations followed, pools are fully fenced with self-closing/locking gates, pool rules are in the open, depth markers are clearly marked on the top deck (not on the inside of the pool), a shepherd’s hook and other general life safety equipment is readily available and the pool drain has been approved per the Virginia Graeme Baker Pool and Spa Safety Act.

RECOMMENDATION: Associations with pool covers or those who want to add them should:

1. Contact your insurance broker to make sure there aren’t any policy exclusions related to pool covers;
2. Seek approval from appropriate regulatory agencies;
3. Follow applicable safety regulations;
4. Hire licensed, experienced pool operators to maintain your pool and equipment; and
   
5. Have your insurance carrier inspect your pool, and then implement any safety recommendations made by the carrier.

QUESTION: Our bylaws state that the president, vice-president and treasurer have check signing authority and require two signatures on all checks written. Can the board authorize other directors to sign as well?

ANSWER: Other directors can sign checks provided (i) your bylaws do not limit signers to only the president, vice-president and treasurer and (ii) the board approves the additional signers.

QUESTION: I am the manager of an association and my husband is on the board. Is there a conflict of interest?

ANSWER: There is nothing illegal with the arrangement. However, potential conflicts of interest arise whenever a director is sleeping with the manager. As long as your husband discloses the relationship and recuses himself from any matters involving you (raises, disciplinary actions, etc.), he can continue on the board and you can continue to manage the property.

Personal Attacks. You should be aware that someone with an agenda (or who just likes to stir up trouble), will make personal attacks against you and accuse the two of you of all manner of crimes and misdemeanors. If you are willing to put up with the nonsense, you can both continue in your positions–just be careful not to allow any hint of impropriety.

Getting Out #1. I can’t stop laughing. THANK YOU for starting my Monday on such a positive note. -Helene S.

Getting Out #2. Still laughing and ready to climb the wall to get out of the association. -Gloria F.

Stray Cats. It’s spay, not spade unless they are burying the poor kitties! -Cynthia C.

Stray Cats. An owner in our HOA took in a stray dog rather than send it to the pound to be reclaimed. She spayed the dog and gave it a good home. Four months later the original owner saw her walking the dog and called the police for dog napping. The dog was a breeding champion pedigree. She was given 30 days suspended sentence and ordered to pay $700 for each unborn future puppy (estimated at 15 pups) for a total of $10,500 plus court costs. -Vince B.

PERSONAL NOTE. I spent the weekend visiting clients in Sacramento and attending CAI’s Legislative Action Committee meeting. The Committee identified Assembly Bill 2273 as legislation that would help HOAs remain solvent. Currently, many banks are foreclosing on properties and then refusing to record deeds so as to avoid paying HOA assessments. This increases the financial strain on associations, forcing existing homeowners to pay higher assessments.

AB 2273 requires recordation of a sale within 30 days of the sale. There will be considerable opposition from the banking industry. That is why we need your help to pass this bill. The vote is Tuesday and your letter to the Housing Committee is needed ASAP. Please sign and fax this letter to (916) 772-3781.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

QUESTION: A buyer can’t obtain financing because the lender requires a lower delinquency for our association. If we had one less delinquency, escrow could close. The buyer wants to pay off one of the delinquent owner accounts to move the escrow along. Can this be done?

ANSWER: Yes, it can be done. It makes no difference to the association from either an accounting or income tax standpoint who pays a member’s assessment or delinquency fees. The HOA merely applies the payment to the delinquent member’s account. The best approach is for the association to put the buyer together with one of the delinquent owners (with that owner’s permission) and let money change hands between them. The recipient of the gift then pays off his delinquency.

Thank you to William Erlanger, CPA of Levy, Erlanger & Co. and Steven Schonwit, CPA of the Schonwit Consulting Group for their assistance with this question.

QUESTION: Our board elected two vice-presidents, in addition to a President, Secretary and Treasurer! Is it legal to have two Vice Presidents????

ANSWER: There is no need to speed-dial the police. It is perfectly legal to have two vice-presidents. It is not unusual for boards to designate one director as “1st Vice-President” and another as “2nd Vice-President.” When the President can’t attend, the 1st VP runs the meeting. When the President and 1st VP both miss a meeting, the 2nd VP steps in. (See Robert’s Rules of Order, 11th edition, pp. 457-458.)

QUESTION: I would like information about how to get out of my association.

ANSWER: Option #1. Wait until dark, climb the perimeter wall and run. Option #2. Call a Realtor and list your property at below market prices for a quick sale. Disclose everything. Smile and tell buyers how much you love your association. Option #3. Dissolve your association (probably not a viable option).

QUESTION: Our CPA wants me (as president) to sign a management representations letter for his review of our annual financial statement. It contains statements about our accounting policies and procedures but I have no knowledge about these–our management company handles it all. Both the CPA and our manager tell me to sign it because it is “just a form letter” and says “to the best of my knowledge & belief.” Do I really have to sign this?

ANSWER: If you agree with the representations in the letter, you should sign it. If you’re uncertain, you should investigate them until you are satisfied.

Financial Statements. Associations with a gross income exceeding $75,000 must annually have a CPA prepare a written report of the financial condition of the association. The CPA’s examination of the “financial statement” must be completed and distributed to the membership within 120 days of the end of the association’s fiscal year. Civ. Code §1365(c). Finances are either audited or reviewed, depending on the level called for in the association’s governing documents. If your documents are silent, the Davis-Stirling Act calls for a review.

Representations Required. As part of the review process, CPAs require a signed representations letter describing the management practices of the association. “Management” includes board members. The letter is one of the steps CPAs must follow to satisfy the review and auditing standards issued by the American Institute of CPAs. (See sample representation letter recommended by Thomson Reuters in their CPA’s Guide to Homeowners Associations.)

Signatures. Typically, the signatures of two board members (usually the president and treasurer) and the manager are required. The representations are to the best of the knowledge and belief of the signers. Even though the financial statement is the association’s, the manager signs because he/she is the primary source of information in the statement. If directors refuse to sign, the CPA issues a draft report instead of a final signed statement.

RECOMMENDATION: Boards should be familiar with the representations in the letter. When associations are defrauded, it is usually because boards delegate too much financial authority to one person (a director or the management company). It’s always the “trusted” person who has the opportunity to embezzle funds.

For their assistance with this question, thanks goes to Ronald Stone, PhD, CPA who teaches at the College of Business and Economics at Cal. State Northridge, and Creighton Tevlin, CPA who specializes in HOAs.

Polar Bears: It isn’t just a matter of heating the pool; the pumps to circulate the water can also be very costly. Filters and maintenance also count. The easiest saver for any pool is a pool cover which reduces heat loss, water loss and chemical loss. -Connie M.

Stray Cats. There used to be a cat committee at our association with members who would sit in the forest and meadows for hours to capture cats, have them spade and find homes for them. What a noble contribution to the feline world. -Patty F.

Death Sentence. We were home to a momma raccoon and her babies who was only there to eat the food that was left out. One homeowner was feeding them until she learned that the HOA would be trapping the animals and that once trapped they would be killed. Her compassion shifted when she saw she was providing a death sentence. Once she stopped, the raccoon family moved on. -Paul C.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

QUESTION: We have a lady who feeds many stray cats in the common areas. Because she leaves out food, it attracts possums, raccoons and rodents. She totally ignores our letters. What can we do? Can we fine her? She is creating a dangerous environment.

ANSWER: You can fine her under the nuisance provision of your CC&Rs, provided the association has a published fine schedule and she is given due process. Another consideration is to bill her for any increase in pest control costs the association incurs as a result of her behavior. The costs could be charged as a fee or, if your documents allow, a reimbursement special assessment (the difference affects collection efforts). Remember, however, that if the fees end up in court, you must have sufficient evidence to convince a judge that the rat, possum and raccoon activity is the result of her behavior and not related to other factors. As a practical matter, if there are “homeless” cats that are hungry, people will feed them, whether it is this particular woman or others. You may want to work with pest control to trap the cats and remove them to a shelter. Under the law of unintended consequences, removing the cats may allow the rodent population to increase, so you should set traps for them as well.

QUESTION: We have a swimming pool that is unused by the many old people in our building. When I bought my unit 20 years ago, I was told that the swimming pool heater was always on from April until October. This has always been the policy. The old people who control the board, do not want to do this, thereby keeping the pool heater off until close to June. Can this be done?

ANSWER: The old people on your board may be helping Al Gore save polar bears. If not, it could be a business decision by the directors to save money. Boards are elected by the membership to oversee the common areas. One of their duties is to weigh costs and benefits when it comes to operational issues. In other words, boards can weigh the cost of heating the pool against the benefit received, i.e., the number of people who use the pool. Why should members pay higher dues to heat the pool if only one person benefits?

Litigation. The courts have already determined that boards, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, have the authority to exercise discretion within the scope of their authority when it comes to maintenance issues. It’s called “judicial deference.” Lamden v. La Jolla Shores. Thus, if you litigated the issue, you would likely lose.

Alternatives. You do, however, have recourse. You and others who are like-minded can run for the board and, if elected, turn on the pool heater. An alternative solution is the installation of a solar heating system. If you can find a reasonable means of funding the installation, you could have a year-round heated pool without the costly heating bills.

QUESTION. We have unmarried owners of separate units who both serve on the board. They have fallen love and plan to marry. Can they continue to serve on the board after they are married?

ANSWER: Provided there are no restrictions in your governing documents, a husband and wife can serve together on the board. However, you may want to advise them to first seek marriage counseling or put a divorce lawyer on retainer.

QUESTION: If the association is named as additionally insured on the management company’s fidelity bond can it make claims against the bond? Does the management company use a single bond or do they take out separate bonds for each HOA?

ANSWER: As a reminder, a fidelity bond is a type of insurance that protects a business from losses resulting from the dishonest acts of its employees. Depending on the carrier, associations can be added as “Joint Loss Payees” on a management company’s bond. If the insurer agrees, it will pay jointly to the HOA and the management company in the event of a covered loss.

Multiple Bonds? It is unlikely a management company could buy a separate bond for each association. Instead, the carrier would issue a single bond covering the management company and all of its clients.

Coverage Limits. The problem with a single bond is the coverage limit. Is it high enough to cover all of the company’s associations? As noted last week, Fannie Mae and Freddie Mac require coverage of 100% of an association’s current reserves plus three months of assessments. How would a board know that the management company’s bond was sufficient without full financial knowledge of the reserves and assessments of all the associations the company managed? If the management company has a million dollar bond, a small portfolio of large associations would easily blow past that limit, thereby leaving all associations at risk and violating Fannie Mae requirements. Moreover, the bigger the management company, the bigger the problem.

Principals Not Covered. Another problem with traditional management company policies is that principals of the company are normally not covered by their bond since principals cannot insure against your own misconduct, only that of their employees. That puts associations at risk if the owner of the company is the one embezzling funds.

RECOMMENDATION: The best approach is to have a fidelity bond in the name of the association with a “managing agent rider” extending coverage to the dishonest acts of the management company, including the principals. As the first named insured and policyholder, the association would then have the right to submit a claim, control coverage limits (which are not shared with other associations) and receive notification in the event the policy is canceled or modified.

Thank you to Patrick Prendiville of the Prendiville Insurance Agency and Timothy Cline of the Timothy Cline Insurance Agency for their assistance with this question.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

QUESTION: Can homeowners use an online petition such as www.GoPetition.com to recall the board?

ANSWER: Your question raises two issues. First, just to be clear, petitions cannot be used in place of secret ballots to recall a board. Petitions can only be used to call special meetings of the membership. Second, just as California does not recognize electronic petitions for ballot initiatives, I don’t believe homeowners can use them as a substitute for paper-and-ink petitions to call membership meetings.

Verification of Signatures. The Corporations Code provides that special meetings of the membership can be called by 5% or more of the members. Corp. Code §7510(e). The request must be in writing. Corp. Code §7511(c). Since only members can sign petitions, associations have the right to verify the signatures. With paper-and-ink petitions, members sign their names in their own distinctive handwriting styles. As such, signatures cannot easily be forged and associations can readily verify them.

Electronic Signatures. Electronic signatures, on the other hand, are easily forged by a petitioner plus anyone can “sign” a petition (children, non-member spouses, tenants, etc.) with the click of a mouse. Moreover, the purported signatures cannot readily be verified by management, staff or Inspectors of Election. The law requires that reasonable measures be in place to verify that the sender of an electronic message (or signer of an electronic petition) is a member of the association purporting to send the transmission. Corp. Code §21. While safeguards could be created by an association for petitions it generates, such measures would be difficult to establish when the petitions are produced by other parties.

OPINION: At some point in the future, electronic petitions may become acceptable to California for public ballot initiatives and corporate petitions. Until that happens, paper-and-ink is the only acceptable format when members petition a board for a special meeting to recall the board, amend governing documents, invalidate a rule change, etc.

REQUEST FOR PROPOSAL

Request for Proposal. Too often, large maintenance projects such as roof replacements, copper repiping projects, painting & waterproofing projects, etc., start with a “Request for Proposal” (RFP) from the board to various contractors. Boards ask contractors to propose how they would repair the association’s roofs or paint their buildings. Each contractor then submits a proposal based on his own approach to the project. As a result, the bids can vary significantly in the quality and quantity of materials used and how they are applied. That leads to large disparities in project pricing. Boards then pick a bid not realizing they may be selecting an expensive application of a shoddy product by an inexperienced contractor with little or no insurance and meaningless warranties. This could have serious legal consequences for the association (and the board).

Request for Bid. The best method for obtaining true bids is by using a “Request for Bid” (RFB). With an RFB all vendors are provided identical specifications describing the scope of work, the quality of materials to use, how the work will be done, levels of insurance required and a timeline for completion. This allows for true competitive bidding. To prepare a proper RFB and oversee the bidding, the board must employ the services of an independent consultant or construction manager.

RECOMMENDATION: Litigation is expensive and unpredictable. It is far better to hire a good consultant to prepare proper bid specs than to spend the association’s money in court, levying special assessments for legal fees, and redoing flawed project at the end of the litigation. In addition to proper bid specs, all contracts should be reviewed by legal counsel.

QUESTION: In last week’s newsletter you said the FHA is now allowing management companies to be on the association’s fidelity bond. Why should they be on the association’s policy? Shouldn’t they carry their own?

ANSWER: Yes, management companies should carry their own fidelity bond but that does not necessarily protect associations. The basic objective of a fidelity bond is to restore an association’s funds should they be stolen through embezzlement or otherwise. The best protection is for each association to carry its own bond rather than rely on the management company’s bond.

Management Company Bonds. The problems with management company bonds are two-fold. First, depending on the policy, the bond may not cover the association at all. It may only cover theft of management company monies by management company employees. Second, a fidelity bond carried by a management company will be in the company’s name. Thus, even if the policy offers theft protection, the association has no insurable interest and cannot directly collect from the insurer. In other words, if an employee of the management company steals from the association, the policy will pay claims to the management company, not the association. The association would have to rely on the management company to reimburse the board for the loss.

Association Bonds. Virtually all HOA fidelity bonds cover theft by board members. That coverage is important but not enough. Boards should make sure coverage is extended to everyone in the association’s money-chain, including HOA employees and the management company. As the named insured, the association can then make a claim directly on the policy if anyone in the chain steals the association’s money. The same cannot be said for management company bonds.

Recommended Amount. Fannie Mae and Freddie Mac require coverage of 100% of an association’s current reserves plus three months of assessments. However, an association’s governing documents may require a greater amount. Boards should check their documents before establishing a bond amount. If their documents are silent, boards should carry coverage in amounts required by Fannie Mae or better.

Loss Control. Rather than trying to recover stolen money, associations would be better served to avoid thefts altogether. To protect against loss, boards should (i) maintain separate bank accounts for operating and reserve accounts, (ii) require the signatures of two directors on any check from the association’s reserve account, (iii) not give authority to the management company to transfer funds from the association’s reserves, (iv) establish internal controls over the association’s assets, (v) personally review financial records, (vi) adopt a conflict of interest policy, and (vii) hire an independent CPA to annually review or audit the association’s financial statement.

RECOMMENDATION: When it comes to fidelity bonds, a policy in the name of the association covering the acts of the manager and the management company is the safest course of action. A management company’s bond may provide some additional protection but boards should not rely on it as their sole remedy. It should only be a backup.

Thank you to Patrick Prendiville, CIRMS of the Prendiville Insurance Agency for his assistance with this question.

-Adrian J. Adams, Esq.

QUESTION: My husband and I made a standing request for board minutes but management said we have to submit a new request EVERY month! This seems ridiculous.

ANSWER: I suspect a judge would agree with you. The Open Meeting Act states that minutes must be distributed to any member upon request. Civ. Code §1363.05(d). The statute does not state how often the request must be made, which means it is open to interpretation. A judge could deem the requirement for monthly requests to be an unreasonable barrier to a member’s right to minutes. If so, the court could impose a $500 fine and order the association to produce the minutes. Civ. Code §1365.2(f).

Expenses. If the board is concerned about the expense of copying and mailing minutes, they can bill you for the cost. Civ. Code §1363.05(d). To avoid those costs, the minutes could be emailed each month once you give authorization for electronic delivery. Civ. Code §1365.2(h).

Transparency. To eliminate the problem altogether, your board can and should routinely post minutes (except for executive session minutes) on your association’s website in a password protected area of the site. If your association doesn’t have a website, the board should (i) summarize its meetings in a newsletter, (ii) post minutes on common area bulletin boards and/or (iii) distribute the information each month in the billing statement.

Aide Ontiveros, Esq. Adams Kessler PLC

Requiring members to submit a monthly request makes it look like the board is hiding something. That only creates distrust. Instead, the board should create openness and transparency by keeping members timely informed about the board’s activities.

QUESTION: Would taking away the voting rights of a delinquent homeowner who has filed bankruptcy be a violation of the automatic stay? This homeowner is currently in an accepted payment plan with the HOA.

ANSWER: Your question is a little unclear. If the owner is currently in bankruptcy, you cannot suspend his voting rights. If the owner is out of bankruptcy but delinquent in his payment plan, the association can suspend his voting rights. Your board should run this by legal counsel before taking any action.

Homeowners who volunteer to serve on their boards quickly learn they cannot please everyone. Some owners have legitimate complaints, some complain because they love to complain, and a third category turns malicious. The board of a small association in Orange County had close encounters of the third kind and fought back.

The board suffered through years of abuse from a husband and wife. When the couple focused their attention on the president with unrelenting harassment that culminated in threats and 119 harassing telephone calls in less than two months, the president sued the couple.

The trial lasted five days. The twelve jurors were outraged by the couple’s conduct and returned a unanimous verdict awarding the president $1 million in emotional distress and punitive damages. (Avetoom v. Fridman, Case No. 30-2010-00345490.)

QUESTION: According the the Secretary of State website, I cannot file Form SI-100 online because a CID corporation must also file a SI-CID. For some reason the second form is not online. I submitted paper forms via snail mail only to find out 5 months later that one field was missing a +4 zip code. An online process with a credit card would be much more efficient and insure that forms are correctly filled out before submission. What can I do to help push this process into the computer age?

ANSWER: California government is always behind the business community when it comes to new technology and customer service. As a rule, state agencies tend to be slow, inefficient and costly. Recent paleontological digs have found California’s seal mixed with dinosaur bones in the fossil record. Unlike dinosaurs, however, state agencies never die. They just get bigger.

RECOMMENDATION: Lobby your legislator.

The FHA adjusted an element of the certification requirement for condominium associations.

Previously, management companies had to provide a separate fidelity bond insuring the association as well as themselves (creating insurance problems for management companies). The FHA is dropping the requirement for those management companies named as additional insured on the association’s policy.

But, as with most governmental agencies, the right hand does not know what the left hand is doing. Fannie Mae continues to require that  management companies carry their own fidelity coverage. Complying with FHA and Fannie Mae’s shifting demands continues to be a drag on the housing industry.

RECOMMENDATION: Boards wanting to meet FHA and Fannie Mae requirements should talk to their association’s insurance broker.

Thank you to Scott Iden of US Approvals, LLC, a company specializing in FHA certifications, for this update.

-Adrian J. Adams, ADAMS KESSLER PLC

QUESTION: If a board member is elected to an officer position (i.e. Vice-President or Treasurer) by the board, can the director refuse to accept the position without resigning from the board?

ANSWER: Yes. Just as a homeowner can refuse election to the board, a director can decline appointment to an office. Refusing an officer position does not mean you forfeit your seat on the board of directors.

Corp. Code Requirement. Having said that, if everyone on the board refuses to serve as an officer, it puts the association in violation of the Corporations Code which requires the appointment of a President, Secretary and Treasurer. Sometimes directors need to share the pain so as not to overload one director with all responsibilities. If your fellow directors think you are the best person for a particular office, you should give it serious consideration.

ANSWER: Although Corporations Code §8334 gives directors an “absolute” right to inspect all association records, California courts have limited that right. In situations where there are privacy concerns, a conflict of interest, or a potential violation of fiduciary duties, a director’s rights are limited.

Director Litigation. For example, in a case where a director who had sued the corporation and then tried to exercise his “absolute” right to view the corporation’s records, the court held that he had no right to access documents covered by the attorney-client privilege that were generated in defense of a suit the director had filed against the corporation. The court reasoned that a plaintiff director cannot take off his “shareholder’s hat” and swap it for his “director’s hat” and claim an absolute right to access all corporate documents. Doing so would advance the director’s personal interests against those of the corporation. Tritek Telecom v. Superior Court.

Architectural Records. Although directors have a right to review architectural records, the same privacy concerns apply. If a director wants to inspect and copy the plans of a neighbor’s home security system, the board should politely decline. I can’t think of a good reason why a director would need to inspect and copy his neighbor’s plans. Moreover, security systems are specifically protected from disclosure by the Davis-Stirling Act. Civ. Code §1365.2(d)(1)(E)(vi).

Azadeh Saghian, Esq. Adams Kessler PLC

RECOMMENDATION: If a board believes that a director’s request for records is for an improper purpose, the board should consult legal counsel before releasing them. A director’s rights are not absolute and must be balanced against owner privacy rights.

QUESTION: Our board recently appointed a former director as a “legal” consultant because of her prior service on the board. She now attends executive sessions and advises the board on legal matters. She has no legal background whatsoever and, to be honest, is somewhat of a busybody. Is it legal to let a homeowner be privy to privileged legal matters?

ANSWER: Disclosing privileged information to a homeowner is not “illegal.” In other words, directors cannot be prosecuted and sent to jail for making her a legal consultant. The arrangement is, however, incredibly risky and exhibits poor judgment that may expose the association to legal liability and put directors at personal risk. There are two serious problems with the arrangement.

Business Judgment Rule. The first problem is that seeking legal advice from a non-lawyer violates the Business Judgment Rule. The BJR protects directors from personal liability if they act (i) in good faith, (ii) in a manner which directors believe to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Corp. Code §7231(c). It’s the third prong that gets the  board in trouble. Would an ordinarily prudent person seek legal advice from a non-lawyer? I don’t believe a judge or jury would think so. If the board relied on the “legal advice” of a homeowner that resulted in damage to a third party, directors could be personally liable.

Attorney-Client Privilege. The second problem involves the breach of the attorney-client privilege. Communications between the board and their attorney (the kind that went to law school and passed the Bar) are privileged and cannot be discovered in litigation unless a waiver has occurred. The purpose of the privilege is to encourage full and frank communications between the board and legal counsel. If the board is sharing their communications with a former director (busybody or not), the privilege could be waived and the association’s litigation strategy disclosed to the other side during discovery. I don’t think a court would consider that prudent behavior by directors.

RECOMMENDATION: Your board should thank the former director for her service and quietly dismiss her as “legal adviser” to the board. Your board should not invite former directors to executive sessions and not share privileged communications with them. It should be noted that inviting a managing agent to executive session and involving them in attorney-client communications is allowed.

QUESTION: How long can a board member continue to serve?

ANSWER: Unless your bylaws provide otherwise, board members can serve until the end of time–if the membership keeps electing them and they live that long.

Term Limits. You can, however, amend your bylaws to impose term limits. If done properly, they can be useful. Term limits should be written to take effect only if there are people willing to run for the board. If not, incumbents should be allowed to serve additional terms until such time as others are willing to serve on the board.

-Adrian J. Adams, Esq.

Last year the Legislature rushed through SB 209 and Governor Brown signed it knowing the bill had a number of serious flaws. The legislation allowed the taking of common areas for a homeowners private use in violation of California’s Constitution and the Davis-Stirling Act (which requires approval of 2/3 of the membership before an owner can exclusively use common areas).

Clean-Up Legislation. With the assistance of CAI-CLAC in the drafting of clean-up legislation, SB 880 addresses most of the problems created by SB 209. The bill went through the Legislature on a priority basis, was signed into law on February 29, and took effect immediately.

Utility Lines & Meters. The revised statute gives boards of directors authority to grant exclusive use of common areas to members who run utility lines and install meters in the common areas for charging stations in an owner’s garage or parking space. The bill resolves the “taking” of common areas by requiring associations to enter into a license agreements with owners who install charging stations in the common areas.

Common Area Station. The revised statute gives associations and owners authority to install a charging station in the common area for the use of all members. It gives authority to associations to develop rules for the use of “public” charging stations and allows associations to create new parking spaces where none previously existed to facilitate their installation.

Private Stations. The revised statute authorizes “private” charging stations in the common areas but only if installing it in an owner’s exclusive use common area is impossible or unreasonably expensive. The revised statutes can be viewed at Civil Code §1353.9 and Civil Code §1363.07.

RECOMMENDATION: Associations still face legal and practical problems when it comes to implementing the new requirements. Boards should work with legal counsel to establish policies, procedures and legal safeguards related to electric charging stations. If your association does not have legal counsel, contact us.

California disposes of more than 40 million tons of solid waste each year, 8% of which comes from multifamily residential housing (apartments and condos). To channel a portion of that 8% into recycling, AB 341 requires multifamily residential dwellings of 5 units or more to arrange for recycling services by July 1, 2012.

Budget Line Item. The bill requires local jurisdictions to oversee the recycling programs and to recover their costs from solid waste generators. Costs, like solid waste, roll downhill. As a result, condominium associations can expect higher waste collection fees.

Implementation. Implementing recycling will be quite challenging for many associations since they have little or no space available for setting up recycling collection points in their developments. How recycling will be implemented in those developments is a mystery.

RECOMMENDATION: Associations should check with their local waste haulers to find out if the new requirements indeed apply to them. If so, what costs, if any, will be associated with the recycling? Since this will occur mid-budget for most associations, let’s hope the costs are minimal.

QUESTION: If a homeowner has leased his unit on a long term lease and he is very delinquent on his dues, can the board prohibit the RENTER from using the common area facilities?

ANSWER: Yes, a renter/tenant’s common area privileges can be suspended. When owners lease out their units, they transfer their common area privileges to their tenants. If the owner’s privileges are suspended, the loss flows to the tenant. Before suspending a tenant’s privileges, the board needs to hold a hearing with the owner.

-Adrian J. Adams, Esq.