Condo Law in California

QUESTION: We get minutes from past meetings some 6 months later, reports by CPAs are inconclusive as they clearly state improper and inadequate information. Delinquent assessments are not being pursued. Our funds are mostly unaccounted for or miserably spent. How can we get the board to follow the rules of conducting our business?

ANSWER: You have four options. The first is political–actively campaign to elect responsible directors. If you run into paralyzing apathy from the membership, you have a legal option–go to court and seek an order forcing the board to follow its statutory obligations. Unfortunately, the legal option has no guarantees and can be costly. Your third choice is to live with the mismanagement. However, this could result in large special assessments when the board’s ngeligence catches up with everyone. The fourth option is to sell and get out before the poo hits the fan.

WHEN IS A MEETING A MEETING?

QUESTION: I have been told that if a majority of the board is at a meeting called for some other purpose, such as a discussion group or advisory committee, that this is an illegal board meeting. This seems prohibitive. Just being in attendance, it seems to me, is not a board meeting. Could you clarify?

ANSWER: Directors are not prohibited from attending barbeques, birthday parties or committee meetings, unless a majority of the directors “hear, discuss, or deliberate upon any item of business scheduled to be heard by the board.” Civil Code §1363.05(j) If the matters discussed in a committee meeting are not scheduled to be heard by the board, a majority of directors can attend and participate. It’s entirely possible the committee’s discussions will result in recommendations that will ultimately be scheduled to be heard by the board. This appears to be permissible. For example, directors attend a landscape committee meeting where the removal of a tree is discussed by the committee. This matter has not been scheduled for board action but may be added to the agenda after further research by the committee. Even so, the safest course of action is to give notice of committee meetings whenever a majority of directors plan to attend. That way, you avoid any controversy.

QUORUM PROBLEMS

QUESTION: I have an HOA that has not amended its voting rules. They have had 2 meetings to open ballots but still do not have a quorum. We are on the 3rd meeting and still no quorum. What’s next?

ANSWER: The board can (i) continue rescheduling meetings until they get a quorum, or (ii) go into court and ask the court to lower the quorum requirement for this election to the number of votes cast, or (iii) end their attempts at meeting quorum, leave the existing board in place and pour their energies into amending the bylaws to end quorum requirements for the election of directors. I recommend amending your bylaws; it’s the only option that makes sense.

CC&R AMENDMENTS
AND CALIFORNIA

QUESTION: I thought the CC&Rs were a California state document. If we were to change something, doesn’t the state have to amend everyone’s CC&Rs?

ANSWER: CC&Rs are not “state” documents and the state does not oversee the amendment process once the developer transfers control to the association. CC&Rs are unique to each common interest development and are recorded with the County Recorder’s Office. Amendments approved by your membership do not effect the CC&Rs of any other developments in California. Although amendments do not require state review, they should be reviewed by your association’s legal counsel. They must then be sent to the membership for approval using secret ballots. Once an amendment has been approved by your membership, it becomes effective upon recordation.

ZERO VOTES
FOR A CANDIDATE

QUESTION: What happens if one of the three candidates (for a three member board) receives 0 votes?

ANSWER: That person is not elected. The seat remains empty until the new board appoints someone to fill it. Unless the governing documents state otherwise, the new board is not required to appoint the loser to the empty seat. The board may appoint anyone who meets the qualifications to serve on the board.

TREASURER CONFLICT

QUESTION: We have a board member, the treasurer, who is working for our management company and is a signer on the checks. I think this is a major conflict of interest. What do you think?

ANSWER: It depends on his/her role in the management company. If the treasurer’s work does not involve anything related to the association, then the potential for conflict is relatively low. Even so, the treasurer must be recused from all matters related to the management company’s contract. If your treasurer works in the management company’s billing department depositing monies for the association, preparing checks for signature, and preparing the association’s financial statements, then you have significant exposure to financial loss. The treasurer may be completely honest and nothing may ever happen but the potential problems are too great to ignore. In that scenario, the director should immediately step down as treasurer and cease being a signer of checks.

QUESTION: We have a board member who never attends meetings. We asked him to stop running for election if he isn’t willing to participate, but he has ignored this request and is guaranteed reelection because of the shortage of candidates. Can we remove him for non-attendance?

ANSWER: Your no-show is in breach of his fiduciary duties for refusing to attend meetings. Under Corp. Code §7231(a) “A director shall perform the duties of a director . . .” Under the Davis-Stirling Act, he has a further duty to monitor the association’s finances (Civ. Code §1365.5). His failure to attend meetings means he is missing the treasurer’s report, not reviewing financial records, and not asking questions about finances–a further breach of his fiduciary duties. A person who consents to being a director and then refuses to participate loses the protections of Civil Code §1365.7(a). As such, he may face personal liability if something happens.

Bylaw Amendment. To remove your problem director from the board you need to amend your bylaws. As provided for in Corp. Code §7151 the membership can prescribe qualifications for directors, including meeting attendance, and give your board the power to declare vacant the seat of any director who fails to meet those qualifications.

PROS AND CONS OF
CUMULATIVE VOTING

QUESTION: Our board is discussing whether or not cumulative voting should be removed from our governing documents. Although your website encourages the removal of cumulative voting, three board members disagree, saying it gives the minority a voice. In order to present accurate information to the membership, what are the pros and cons of cumulative voting?

ANSWER: For established associations, there are no true benefits to cumulative voting, i.e., if there are 5 open seats, you can cast all 5 votes for a single candidate. There is not a single municipal, county, state, or federal election that uses cumulative voting. This kind of voting was intended for stock corporations so small shareholders would have a voice. Otherwise, companies would be completely dominated by large shareholders. Cumulative voting is automatically included in new HOA bylaws to give owners a voice when the association is controlled by the developer. Once the developer is out of the picture, there is no need for cumulative voting.

Problems. The problems with cumulative voting far outweigh any theoretical benefit related to minority interests. Cumulative voting makes it easy for disruptive, fringe, and single-issue candidates to get on the board. Moreover, once a bad director has been elected, cumulative voting makes it almost impossible for the membership to remove that director from the board. With a conventional voting system, i.e., casting one vote for each candidate, candidates must seek a broader base of support thereby increasing the likelihood that more moderate, business-like candidates are elected.

Amendment. Because cumulative voting is optional under Corp. Code §7615(a), associations can amend their governing documents to remove it.

DYSFUNCTIONAL DIRECTOR

QUESTION: Our bylaws have cumulative voting but the board wants to stop using it because we have a dysfunctional owner who keeps getting elected by his friends. The rest of the board can’t work with him and is threatening to resign. If that happens, I’m afraid we won’t be able to recruit anyone to serve on the board. Can the board vote to eliminate cumulative voting?

ANSWER: If cumulative voting is in your bylaws, you are required to use it. As provided for in Civil Code 1363.03(b), “An association shall allow for cumulative voting . . . if cumulative voting is provided for in the governing documents.” To get rid of it, the membership must vote to amend the bylaws. You should check your CC&Rs as well, they sometimes contain a cumulative voting provision.

RESTRICTED TO ONE-YEAR TERMS?

QUESTION: An attorney told me that cumulative voting can be used only with one-year terms for directors. I don’t see that anywhere in the Corporations Code.

ANSWER: I am not aware of anything that restricts cumulative voting to 1-year term elections. Many associations use cumulative voting for elections involving two-year and three-year terms.

FEEDBACK ON ROBERT’S RULES

Majority Defined. 50% + 1 is NOT the definition of a majority. A majority is the next highest whole number above 50%. If you have 10 members, 50% = 5 and 5+1 is 6, that works, BUT if you have 11 members 50% is 5.5, and 5.5 + 1 is 6.5, you have not solved the problem. Rather than rounding, just use the above definition and it will always be correct. (see Roberts page 387)

Chair’s right to vote. The Chair may vote at any time, however to maintain an appearance of neutrality, the Chair normally only votes when it matters, such as to break, or make a tie, or a 2/3. However, there are special rules for small boards, 10 or less, found on page 470 of the 10th edition of Roberts which states in part that in small boards the chair is a fully participating member, makes motions, debates and votes as any other member. -James Stewart, Mister Parliamentarian

DUPLICATE BALLOTS

QUESTION: We are getting duplicate ballots from owners who want to change their vote. Some attorneys say the first ballot received counts and others say the two ballots cancel each other.

ANSWER: The first ballot counts. Although California’s Election Code allows absentee voters to retrieve their ballot and cast a new one, no such provision was adopted in the Davis-Stirling Act. In fact, the opposite was adopted. The Act specifically provides that once ballots have been received by the Inspector of Elections, they are irrevocable. Civil Code 1363.03(f)

No Cancellation. Therefore, the second ballot does not cancel the first ballot. If the Inspector allows a second ballot to invalidate the first, then the first ballot has been “revoked” by the second contrary to statute. The Inspector of Elections should instead mark any subsequent ballots as “invalid” and put them in a separate pile where they remain unopened.

QUESTION: Two of our residents started dating before they ran for the board. They were voted in, one as president the other as secretary. Is this okay or does one have to resign?

ANSWER. Neither one needs to resign; they are allowed to date. It’s possible their judgment may be clouded from time to time but there are no inherent conflicts of interest in their relationship.

BAD DIRECTORS

QUESTION: There are many poor to bad board members who have a cavalier attitude regarding what they do as a director and the effect it has on owners. Do you have an opinion regarding this?

ANSWER: True, there are many bad directors with cavalier attitudes–I’ve suffered through my share of them. But for every bad director, there are ten good directors who receive little or no credit for their contribution to the association. Truly bad directors make everyone miserable and there is very little that can be done about them except for the board to censure them and the membership to remove them through a recall. Perhaps the only consolation is that bad directors can actually be removed from office, unlike bad government bureaucrats with cavalier attitudes.

FALLING BRANCHES

QUESTION: Our association has a tree limb extending into the back yard of a neighboring property. If it breaks and causes damage are we liable?

ANSWER: As a rule, owners are responsible for injury caused to others by their want of ordinary care or skill in the management of their property. If the tree belongs to the association, the board is responsible for properly caring for the tree so as to prevent any foreseeable damage to the neighboring property.

Negligence. If the tree has dead or dying branches and the board was warned they needed pruning, and the board fails or refuses to do so, and a dead limb crashes into the neighbor’s house, you will likely be liable. If there is nothing wrong with the tree, you are not required to remove a healthy limb just because your neighbor dislikes it. Even so, your neighbor may treat the overhanging limb as nuisance.

Nuisance. Even though the neighboring property has sustained no injury by the overhanging limb, branches and roots that intrude onto the property of another are considered a nuisance and your neighbor may abate the nuisance by cutting the offending branches and roots at the boundary line–so long as he acts reasonably not to seriously damage your tree. (Civil Code §3346)

Falling Leaves. Your neighbor might also be unhappy about falling leaves from your tree. If so, he cannot demand that you control or clean up the leaves, so long as you reasonably maintain your tree.

ABSTENTIONS

Feedback #1. If a board is using Roberts Rules of Order, they usually call for a president to not vote except to make or break a tie. Since it takes 50% + 1 to pass. A tie means the motion fails. An abstention would have the same affect. -Stephen F.

COMMENT. You are correct. However, unless an association’s bylaws or CC&Rs require it, boards are not obligated to follow Robert’s Rules of Order (or any other parliamentary system) for their board meetings. The Davis-Stirling Act calls for the adoption of a parliamentary system only for membership meetings. Civil Code §1363(d)

Feedback #2. In a four-unit condominium (four votes total), if two of the four board members vote “yes” on a motion and two abstain, does the motion pass?

ANSWER: The motion fails. That is why there should always be an odd number of directors–it is too easy for an even numbered board to deadlock. You should amend your documents to reduce the number of directors to three.

PLAYGROUND RECYCLED RUBBER

The Environmental Protection Agency (EPA) is having second thoughts about its endorsement of the use of shredded tires as a substitute for sand in playground tot lots. The concern is that shredded tires could contain carcinogens or other chemicals that could be a hazard with repeated contact with children’s skin.

Association boards may want to delay the purchase of such materials pending the EPA’s decision. If the EPA reverses itself and requires the removal of shredded tire materials, the cost could be significant. The results of a long-term study are expected within the month. Thank you to manager John Kevin Dillon for alerting me to this issue.

On May 26, 2009, the United States Court of Appeals upheld the FCC’s order banning cable companies from entering into exclusive contracts to provide telecommunications services in multi-unit developments such as condominiums. The court also upheld the portion of the FCC order prohibiting the enforcement of such exclusivity provisions in existing cable contracts.

The court agreed with the FCC that these exclusivity agreements “which involve a cable company exchanging a valuable service like wiring a building for the exclusive right to provide service to the residents†, have an anti-competitive effect on the cable market and significantly impair the ability of their competitors to deliver programming to consumers.

Undecided Issues. There are several related issues which are still pending before the FCC:

• Should private cable operators be covered by the exclusivity ban?

• Should the FCC regulate exclusive marketing agreements between cable companies and multi-unit developments?

• Should contracts for bulk services be banned or otherwise limited?

We will be monitoring the FCC’s actions on these issues and will provide updates in future newsletters.

Existing and Future Contracts. Any association which currently has an exclusive cable contract should have counsel review their particular agreement to determine how to proceed. Additionally, associations should carefully review the proposed terms of any future contracts with telecommunications service providers (including those which are not covered by the FCC order such as satellite companies and phone companies). Watch out for provider attempts to use side “exclusive marketing agreements†, “inside wiring control agreements†or “bulk rate agreements†as de facto exclusivity agreements which indirectly keep competitors out of the association for long periods of time. Also, check to see if the provider seeks to retain the right to unilaterally increase prices after these side-agreements are executed, or if the provider wants to obtain long term exclusive control over inside wiring.

REPEAT VIOLATIONS

Feedback #1. Sheesh, it is scary that Ed [who opposes hearings on repeat violations] has been doing this work for years and seems to have a “shoot first and ask later” attitude. Seriously, in this country a person is innocent until they have due process. Ed assumes that no matter what, a person is guilty because of their past. Pretty sad in my opinion. Every case CAN be different. -SL

Feedback #2. We do not push fines with our clients. Generally they are insufficient to recover the time and effort incurred by management. We prefer to charge, after due process, a charge which is based on the cost that the association has incurred. As you know, getting a judgment so that you can collect a fine is difficult. So, our management contract says that compliance administration, which consist of many administrative actions leading up to meetings/hearings, is accounted for in the same way as most law offices do. We use “Time Slips,†and account for the effort and expenses. We keep track of our services either routine or extra from time slips. The routine services are provided on a fixed monthly fee and the extra services, including compliance administration and the like, are identified so that we can gage our costs of services. -Doug Christison CCAM, PCAM

After my newsletter last Sunday announcing the addition of Google to the website, we had a meltdown because of the number of users on the site. The system slowed to a crawl. That was not supposed to happen so I want to apologize to everyone. Our website provider made adjustments so it shouldn’t happen again. -Adrian Adams

APPROVING LIENS

QUESTION: With more homeowners falling behind on assessments (dues?), pre-lien warnings have increased in our association. To go to lien, the law requires that “The board shall approve the decision (to record a lien for delinquent assessments) by a majority vote of the board members in an open meeting.” Does this mean that we have to do this for each lien we record, or just for the initial decision to establish an association policy that liens will be recorded 30 days after pre-lien if no payment is received?

ANSWER: In addition to establishing a collection policy, boards must vote to authorize each lien. Boards can approve them one by one, or vote on a single motion to “file a lien on the following three units.†The lien authorization must be made in an open meeting and recorded in the minutes. Foreclosure resolutions must be done separately in executive session.

VOTE TO “ABSTAIN”

QUESTION: Our board has 11 members; if 5 vote yes, 5 vote no and 1 abstains, does the abstention fall with the yes or the no vote?

ANSWER: Neither. If a director abstains from voting, that means the director has not voted. An abstention does not count as a yes or a no vote, it is a non-vote, a decision not to make a decision.