Condo Law in California

I previously reported that Tina Rasnow had proposed legislation that would void CC&R restrictions against clotheslines. She believed that forcing condominium associations to use clotheslines would reduce average household energy consumption by 10%, thereby reducing greenhouse gases and global warming.

The Conference of Delegates of California Bar Associations took up the issue and recommended disapproval of the resolution. Following are their comments:

LOS ANGELES COUNTY BAR ASSOCIATION. The existing definition of solar energy system set forth in Civil Code 714 sufficiently captures qualified solar devices. Furthermore, the vast majority of people do not want to use clotheslines instead of mechanical clothes dryers and most people do not want to have their yards or their neighbor’s yards strewn with clothes lines and clothes. This change will create protection for a public eyesore which has the very real possibility of detracting from property values. Furthermore, this could potentially interfere with municipalities’ ability to enforce certain codes relating to nuisances. This resolution should be disapproved.

ORANGE COUNTY BAR ASSOCIATION. The intent of this resolution is to declare void covenants, conditions and restrictions in deeds to real property prohibiting clotheslines on said property in the guise of creating an easement by Civil Code Section 714(a). The easement provided for Section 714(a) should NOT be expanded to include clotheslines as “passive solar devices†incorporating by reference Civil Code Section 801.5 a)(2) and (3) because the intent of Section 714(a) was to apply only to SPECIFIC “solar energy systems†and NOT to “passive solar devices.†In addition, California’s overriding interest in a “green†environment would not be advanced by the hanging of laundry on residential or commercial property.

SAN DIEGO COUNTY BAR ASSOCIATION. The San Diego County Bar Association encourages the development of a set of laws designed to promote the use of solar power. However, this resolution, as drafted, is troublesome insofar as it appears overly broad and undefined. As written, it would sweepingly invalidate potentially important provisions in community governing documents. Community associations have a legitimate interest in regulating improvements within their jurisdiction. Homeowners in planned communities should not have the unfettered ability to construct any mechanism in their yard and call it a passive solar device.

You can find the resolution and comments at: California Bar Delegates

Adrian Adams

Some readers asked if their associations could use brokerage accounts. These accounts allow investment brokers, such as the financially unstable Merrill Lynch (acquired by Bank of America) and investment bank Lehman Brothers (which filed for bankruptcy), to manage the association’s funds for a fee.

Generally, account managers like to invest their clients’ monies in stocks, bonds, and mutual funds–all of which should be avoided by boards because of the risk. If boards were to restrict brokerage firm investments to CDs, T-bills, and Ginnie Mae securities (mortgage-backed securities with the full faith and credit of the United States government), then the monies are considered secure. The downsides are (i) the payment of commissions to the brokerage firm to manage the account, and (ii) its limited protections against loss by the SIPC.

The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government, membership corporation, funded by member broker-dealers. The SIPC does not protect against market risk. Its primary role is to return funds to investors if the broker-dealer holding these assets becomes insolvent.

To maximize convenience while minimizing risk, associations should consider the CDARS program described below.

HASSEL OF THE
$100,00 FDIC LIMIT

Last week I talked about protecting association monies by keeping deposits to no more than $100,000 per banking institution. While this protects funds, it creates a hassle for associations with large reserves. If an association has $650,000 in reserves, that means spreading the money between seven banks. It also means seven sets of bank statements that need to be reviewed and seven sets of signature cards that must be signed by the directors (and then re-signed every time the directors change).

CDARS PROGRAM. There is a program called Certificate of Deposit Account Registry Service (CDARS). Customers deposit their money with a participating bank, and their funds are dispersed into individual CDs up to $100,000 in member banks across the country.

SINGLE BANK STATEMENT. This allows associations to deal with one bank, receive a single statement summarizing all their CDs, and remain fully insured by the FDIC. According to the CDARS website (www.cdars.com), there are no hidden fees, no annual charges, no subscription fees, and no transaction fees.

Thank you to Jan Hickenbottom, Vice President of First Bank’s Association Services Division for the above information on the CDARS program. You can find First Bank’s contact information in our Service Directory.

SUPERVISORS DATING
SUBORDINATES

QUESTION: The manager of our association is having an affair with an employee, how best is this handled by the board?

ANSWER: It’s deja vu all over again. Last week it was a manager sleeping with a board member. Whenever you put men and women together, you have sexual attraction. The risk for employers involves the collision of two legal principals. California has a constitutional provision protecting privacy, which means romantic relationships between coworkers should be none of the association’s business. However, this runs headlong into a competing principal against sexual harassment, i.e., employees should not feel pressured to submit to sexual advances to preserve their jobs.

Risks. In addition to potential claims of sexual harassment, associations face other risks. The first is that the manager ceases to be objective about his/her subordinate’s work performance. This often leads to morale problems with other employees who may believe that preferential treatment is being given to the sexually active co-worker. The second is the loss of internal checks and balances if the manager and subordinate have any control over the association’s monies. Working together, the two can cover a lot of tracks. A third risk is that a breakup could lead to a revenge-motivated lawsuit by the subordinate claiming that the relationship was never consensual. Finally, any disciplinary action against the subordinate could lead to a retaliatory lawsuit.

Prohibit Dating. In my opinion, it is never okay for a supervisor to date a subordinate. The inequality of the supervisor-subordinate relationship creates an element of coercion or claimed coercion. To protect against potential liability, associations should implement workplace rules that prohibit any kind of dating or sexual contact between supervisors and subordinates, whether on duty or off. This avoids the appearance of favoritism, conflicts of interest, and unprofessional or disruptive conduct in the workplace.

Love Contract. If your association does not already have rules prohibiting supervisor-subordinate relationships, you could protect the association by having the manager and staff member sign a consensual relationship agreement, also known as a “love contract.”

The contract requires the manager and subordinate to (i) acknowledge that they are aware of the association’s policy against sexual harassment, (ii) affirm that their relationship is mutually agreeable and not coerced, (iii) consent to guidelines on appropriate office behavior, such as refraining from displays of affection at work and work-related events, and (iv) agree that the relationship may be ended at any time by either party without fear of retaliation.

RECOMMENDATION. Associations with employees should have handbooks, which have been reviewed by legal counsel, distributed to all employees. One of the policies should address the issue of co-worker romantic relationships.

QUESTION: I am the president on our board, and we have gone through management companies quite a bit lately. Our treasurer is a CPA. He and I have been thinking of taking over the management and the books to save the HOA money. We would require compensation. We’d get board approval first, of course, but what are the legal implications?

ANSWER: Many small associations self-manage. However, it’s done with volunteers. Paying directors for service rendered is not illegal provided (i) there is full disclosure, (ii) the fees charged are at or below market, and (iii) the benefited directors recuse themselves from discussion and votes on this and related issues.

Even so, it is not a good idea. In addition to potential conflicts of interest, any time you have a disgruntled owner he/she will go after you and make a myriad of claims involving self-dealing, conflicts of interest, incompetence, over-charging, and so on. It tends to get very personal. To reduce potential conflicts, you should resign from the board—it reduces the large targets on your backs. Another consideration is insurance. Will you be carrying your own insurance? You won’t be covered by the association’s D&O policy for paid services in the event you are sued. If it were me, I would continue using an outside service.

TREASURER’S POWERS

QUESTION: I am the treasurer of our association. Our bylaws state “The Treasurer shall supervise the receipt and deposit in appropriate bank accounts of all monies of the Association, and the expenditure of such monies.” I believe this statement empowers me to direct anything related to collection, deposition, and expenditure of association funds, including the accounting activity used for such purposes, without direct concurrence or intervention from the remaining board members. Is this point of view valid?

ANSWER: No, it’s not valid. The board can still establish policies and procedures for collecting, depositing and spending the association’s monies. The treasurer then supervises to make sure the board’s policies are carried out. The board can give you a great deal of latitude in handling funds, but it is at the board’s discretion. Moreover, the board is responsible for its delegation of duties into your hands. It should be looking over your shoulder to make sure you are doing your job.

SLEEPING WITH EMPLOYEES

QUESTION: We have a female director who is sleeping with our manager. She goes on weekend jaunts and vacations with him. Our board president allows her to remain in executive sessions when we discuss problems with the manager. This has caused problems between the manager and board members who have been critical of the manager. How do we handle this?

ANSWER: The situation you described exposes your association to significant potential liability. If you were to terminate the manager’s services, he might sue claiming sexual harassment. Right now he probably considers sex with your fellow director as a perk of the job. Once he is terminated, he might claim that the “had to” sleep with the director because she was his employer. Employment litigation is quite costly. To avoid such problems, your director should immediately resign from the board. Then she can spend as much time as she wants with the manager without jeopardizing the association. You should also check with the association’s insurance broker to make sure you have employment practices liability coverage.

UNDOCUMENTED WORKERS

QUESTION: I just read your recent newsletter about a board hiring an undocumented worker. We recently underwent a multi-million dollar rehab on our building and the entire work-force was Hispanic. We often wondered how many were undocumented workers. Can an HOA be liable if a contractor is using undocumented workers?

ANSWER: Fortunately, you are only responsible for employees of the association. When it comes to contractors, you need to make sure they are licensed and insured. It is the contractor’s responsibility to make sure his employees are legal.

FINANCIAL MELTDOWN

Just a reminder that with recent reports of instability in the banking system–Washington Mutual Bank (WaMu–the nation’s 6th largest bank) and Wachovia (4th largest bank)–associations need to make sure they do not have more than $100,000 in any one financial institution.

The Federal Deposit Insurance Corporation (FDIC) insures the safety of checking and savings deposits in member banks up to $100,000 per depositor per banking institution (not per bank branch). If a board places $500,000 of its reserves in a single bank (for a jumbo CD so as to receive a greater return on its money) and the bank goes under, the association could lose $400,000. For smaller associations, if the board keeps in the same bank an operating account with $30,000 and a reserve account of $150,000, the association is at risk of losing $80,000. The FDIC does not insure each account separately, it insures the aggregate amount.

RECOMMENDATION: Boards should avoid exceeding $100,000 per financial institution. Instead, they should spread their association’s money between various FDIC insured institutions.

QUESTION: I’m wondering about your statement that officers can’t vote. We have 5 directors on our board, four of which are officers (president, VP, secretary, and treasurer). Does that mean only one director, the one who is not an officer, can vote?

ANSWER: A lot of people are confused by the difference between officers and directors. Directors are elected by and represent the membership, while officers are appointed by the board to keep minutes, oversee financials, etc. Merely being an officer does not give one the power to vote. In many sets of bylaws, officers need not be directors. When directors cast votes, they may incidentally be officers but when they vote, they vote as directors, not officers. The president, vice president, treasurer, and secretary are allowed to vote if they are directors–but they are doing so as directors, not officers.

D&0 INSURANCE REQUIRED

QUESTION: Our HOA has been paying $2,669.00 per year for $2 million D&O liability coverage. I recently read that volunteer officers cannot be sued for anything other than fraud. Our past 8 years of coverage has cost over $16,000. Is this necessary?

ANSWER: You bet it’s necessary. Directors can be sued at any time for any reason, or no reason at all. Homeowners seem to sue their boards on a fairly regular basis for some of the silliest reasons. Even though the business judgment rule protects directors from personal liability for mistakes in judgment, they still need Directors & Officers (D&O) insurance to defend them when they are sued. Litigation is quite expensive and unless your association has a lot of extra money to spend on lawyers, you should buy insurance. Not only is it prudent but you may not have a choice since most CC&Rs require that associations carry D&O insurance.

SIGNING CHECKS

QUESTION: Our bylaws require our president to co-sign all checks. However, our management company contract includes verbiage that they have authority to sign checks for all bills authorized by the board. Our president was not aware of his duty and hasn’t co-signed a check in the 3+ year history of our HOA. Which takes precedence–the management contract or our bylaws?

ANSWER: Your bylaws control. Management contracts are typically permissive, i.e., the management company may sign checks, whereas bylaws are usually mandatory–the president shall co-sign checks. If your management contract is mandatory (the company must co-sign all checks), then it is time to renegotiate the contract. If the company refuses, it’s time for a new management company. No reputable company would force a board into violating its duties under the bylaws.

MANAGEMENT COMPANY ABUSES

QUESTION: My HOA is managed by a horrendously unethical management company. We retained a new management company and gave our old company a 60-day notice of termination but they refuse to provide us with an accounting of our finances. What recourse do we have against this company? Should we report them to the Better Business Bureau and the Department of Real Estate?

ANSWER: Most management companies are ethical and hard working. They are diligent in producing financial records and stoic when dealing with difficult owners. Unfortunately, there are a few truly bad companies that are unethical in their handling of accounts.

Whenever the services of a management company have been terminated, the company must immediately turn over all association records. Refusal to turn over records is a breach of the professional code of conduct for management companies.

Managers and management companies are governed by voluntary codes of ethics established by two different organizations and you should only retain companies that are members of these organizations:

		The California Association of Community Managers (CACM) is a statewide organization with a Code of Professional Ethics for the managers it certifies. For more information go to www.cacm.org.
		The Community Associations Institute (CAI) is a nationwide organization with its own Professional Manager Code of Ethics. For more information go to www.caionline.org.

You can report the company to CAI and CACM as well as the Better Business Bureau. This may help curb the company’s abuses against other associations but probably will not get your records any time soon. Suing the company may be the only effective means of recovering your records.

QUESTION: Our board requires that owners give their open forum topic one week in advance of the meeting, and then does not let them speak on any other issues. In other words, they have to give their topic before the board publishes its agenda. Can the board do this?

ANSWER: I believe a court would deem the practice unreasonable. Not even city councils, which are far more bureaucratic, require a week’s notice. You can attend a city council meeting and simply fill out a request on the night of the meeting. Courts would likely consider the one-week requirement a ruse by the board to keep owners from commenting on agenda topics.

DIRECTORS CANNOT
HOLD TWO SEATS

QUESTION: We have two-year staggered terms. A board member is running for another two-year term while he still has one year left on his current term. Shouldn’t he resign from his current seat before running for another one?

ANSWER: Yes, he should resign. Directors cannot hold multiple seats on the board. If a director has one year left on his term but wants to run for an open two-year seat in an upcoming election, he must resign prior to running for the open seat. Otherwise, the director will hold two seats and improperly have two votes on the board. If he promises to resign his first seat after winning the two-year position, he will immediately create another opening on the board. This defeats the purpose of the election. Only directors whose terms are ending may run for another term (assuming there are no term limits).

OFFICERS CANNOT VOTE

QUESTION: Our board originally had 5 directors. One moved away. With only 4 members, it seemed like the board always deadlocked with 2-2 votes. Since one of our directors is both secretary and treasurer, the president said this entitles him to two votes. Is this legal?

ANSWER: Your secretary/treasurer cannot raise both hands each time he votes. It does not matter that a director holds two offices since officers cannot vote; only directors can vote. If you have four directors, you have four votes–one for each director. If the board cannot agree on who to appoint to the empty seat, they should let the membership elect someone to fill the seat.

VOTING TO VIOLATE THE LAW

QUESTION: The board knowingly hired a worker that is an illegal immigrant. He does not have a social security number so he cannot be added to our payroll. I do not want to be prosecuted or fined because we know his status.

ANSWER: Sometimes boards think they are acting in the association’s best interest if they save money by hiring undocumented workers. It may save a few dollars but it creates significant risk ranging from workers’ comp issues to fines. Your board should immediately terminate his employment.

Personal Liability. Your fellow directors may not realize that they are personally at risk. Insurance will not cover any fines levied for the illegal hiring. Directors will likely be liable for the fines. The business judgment rule will not protect them from liability since knowing violations of the law are not within a director’s scope of duties and a prudent person would not take such actions. If your fellow directors refuse to fire the illegal immigrant, you need to be on record in the minutes opposing the board’s action. If they refuse to put it in the minutes, you need to put it in a letter to each of the directors and keep a copy for your files.