Jun 19

This past Monday the U.S. Supreme Court made a rare unanimous (9-0) ruling in a case involving an ethics issue.

Facts. The case involved a city council member, Michael Carrigan, who voted for a casino development where his long-time personal friend and campaign manager was the developer’s consultant. Carrigan disclosed the relationship but did not recuse himself from the vote.

Censured. By statute in Nevada, legislators with a conflict of interest are prohibited from voting on proposals where a conflict exists and from advocating the proposal’s passage or failure. Carrigan was censured by Nevada’s Commission on Ethics for violating the statute. Carrigan sued the Commission claiming he had a First Amendment “free speech” right to vote on all matters that came before him. The Nevada Supreme Court agreed and voided the statute. The Ethics Commission appealed to the U.S. Supreme Court.

Not Free Speech. The U.S. Supreme Court reversed the Nevada court and upheld the recusal statute. In reaching its decision, the Justices concluded that a legislator’s vote is not free speech. Instead, it is an application of political power and legislators must recuse themselves when a conflict of interest taints the exercise of that power.

Historical Perspective
. As background for their decision, the court cited the long history of recusal in the United States. In 1801 Thomas Jefferson, drafter of the Declaration of Independence and third President of the United States, imposed the following rule on legislators:

Where the private interests of a member are concerned in a bill or question, he is to withdraw. And where such an interest has appeared, his voice [is] disallowed . . . the laws of decency . . . denies to any man to be a judge in his own case.

RECOMMENDATION: Although this particular case involved a Nevada statute, it illustrates the importance of avoiding conflicts of interest. When directors have a conflict, they should disclose it and recuse themselves both from voting and from advocating a particular outcome. To help directors identify potential conflicts, boards should adopt a Code of Ethics. For more on the Court’s decision, see Nevada Commission on Ethics v. Carrigan.

AUTHORIZED SIGNERS
ON BANK ACCOUNTS


QUESTION: Should all five board members be authorized signers on our bank accounts?

ANSWER: Unless your bylaws state otherwise, that is a decision each board can make for itself. Some boards put all directors on bank signatures cards to ensure that at least one director is always available to sign checks. Others restrict the number of authorized signers for stricter control on funds.

Number of Signatures on Checks. For reserve accounts, checks must be signed by at least two directors. For operating accounts, there is no statutory requirement for board signatures but there may be in the governing documents. Some HOA bylaws require the signatures of two directors on all checks, some require at least one officer’s signature but most are silent on the issue.

Managing Agent. When documents are silent about check signing, many associations allow their managing agent to pay routine operational expenses such as utility bills, insurance premiums, contracted services (pool cleaning, elevator maintenance, cable TV, etc.) without director signatures. To limit their agent’s check signing authority, boards require that any unusual expenses or expenses above a certain dollar amount first receive board president authorization or full board authorization or the signature of at least one director. The procedures vary from association to association.

RECOMMENDATION: The authority to transfer funds, whether given to managing agents or limited to directors, creates potential for unauthorized transfers. To protect the association’s funds against embezzlement, boards must (i) be diligent in reviewing bank statements and reconciliations, (ii) establish internal controls, (iii) carry a fidelity bond, and (iv) conduct annual independent reviews.

FEEDBACK

Insurance #1. Thanks for the insurance article; it provided valuable information at a critical time as we are currently rewriting our CC&Rs and had a similar concern regarding insurance. -Rick S.

Insurance #2. How do HOAs secure the mortgage holder’s loan? This is new to me. The association is not a partner to the sale and is not involved in the loan. The association’s insurance to my knowledge insures the condominium structure and common area. What am I missing? -Sam D.

RESPONSE: The HOA does not secure the member’s loan. Rather, it’s the HOA’s insurance that pays for rebuilding the common area elements surrounding the condominium in the event there is a major loss. Without the surrounding structure, the condominium (which is air space) has very little value. If the common areas are not rebuilt, the borrower will likely walk away from the loan and the lender will foreclose on useless air space. Lenders want to make sure HOAs have the funds they need to repair and rebuild the common area structure. Hence, the requirement by Fannie Mae that the association’s policy be primary.

Since California’s Civil Code and Insurance Code are both silent on the HOA’s master policy being primary, it is up to boards and insurance agents to address the issue. Many of the better master policies specifically drafted for condominium associations already have the “primary” language built in but there are plenty of other carriers that do not have the language. As a result, boards should verify with their agents that the HOA’s insurance is primary.

Thanks to Tim Cline, President of the Timothy Cline Insurance Agency, Inc., for his help with the follow-up question.

OOPS!

No newsletters for the next two weeks. I am preparing for trial and also will be out of town. Newsletters will resume on July 10.

Adrian J. Adams, Esq

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Jun 12

QUESTION: Should the association’s insurance be primary and if so should the CC&Rs be amended to state that?

ANSWER: There is no law that requires an association’s insurance be primary. If your governing documents are silent, then it depends on whether the board wants to expand the pool of potential buyers of condominiums in the development. If so, associations must comply with Fannie Mae requirements.

Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is the nation’s largest player in the secondary mortgage market. Fannie Mae operates differently than FHA; instead of insuring loans, it buys FHA  insured loans from lenders. Before it will buy those mortgages, Fannie Mae now requires that an association’s master policy be “primary.” Doing so protects lenders who often rely on the association’s insurance to protect their collateral, i.e., condominiums that secure their loans. As a result, lenders who sell their loans to Fannie Mae in the secondary market will refuse to lend in developments where the association’s insurance is not primary.

Overlapping Insurance. Making the association’s insurance primary eliminates the difficult issue of overlapping insurance. One of the many problems with poorly written CC&Rs is when two policies (owner and HOA) cover the same property. Whenever this occurs there is the risk that insurers will invoke their “other insurance” clause. Following is a typical clause:

Other Insurance. If a loss covered by this policy is also covered by other insurance, except insurance in the name of the condominium, we will pay only our share of the loss. Our share is the proportion of the loss that the applicable limit under this policy bears to the total amount of insurance covering the loss.

When carriers invoke this provision, loss payments get bogged down or stalemate as carriers argue over coverage and their proportional share. This can be avoided with the following solutions:

1.  Amend CC&Rs
.

a.  Maintenance Defined. HOA CC&Rs should clearly define the maintenance duties of members and the association, especially when it comes to exclusive use common area.

b.  Insurance Defined. CC&Rs should clearly define the insurance obligations of members and the association. When there is clarity, insurers can easily fulfill their coverage duties.

c.  Primary Defined. CC&Rs should designate the association’s policy as “primary” so the association pays first, regardless of any other insurance covering the same risk.

2.  Policy Language. If an association’s CC&Rs are silent as to which policy is primary (owner or HOA) and amending the CC&Rs is too difficult,  insurance purchased by boards can always be more stringent than the CC&Rs require, just not less. Thus, boards can require that the association’s policy be written to be “primary,” thereby satisfying Fannie Mae guidelines.

RECOMMENDATION: If associations want access to an expanded pool of buyers, they need to make their insurance primary. Because of the ever-changing FHAFannie Mae and Freddie Mac standards, boards should use insurance brokers who specialize in homeowner associations. In addition, boards should have legal counsel review and, if appropriate, amend CC&R maintenance and insurance provisions for membership approval.

Many thanks to Timothy Cline, CIRMS, President of the Timothy Cline Insurance Agency, Inc. and Dorothy McCorkindale, CPCU, Senior Vice President of Wells Fargo Insurance Services USA, Inc. for their assistance with this question.

FEEDBACK

Cabin #1. Loved your response [to corruption everywhere]! -P.C.

Cabin #2. Right on! I would like to suggest N. Dakota to many owners at my complex. Many people are not suited for this type of living–parking on lawns, purple drapes, trash cans out 7 days a week, barking dogs, etc., etc. -Gloria F.

Cabin #3. The email and U.S. mail requirement struck at the heart of my main complaint about the California Legislature and court system which is the constant nit-picking requirements of this nature. I’ve just completed a 4-year stint on a board of directors and the amount of money wasted to comply with these sort of regulations is mind-boggling. Do you have an address for that cabin in N. Dakota? I’d like to take a look. -David A.

Cabin #4. Perhaps if we had a state agency that had authority to enforce the Davis-Stirling Act we would have no more problems with power hungry directors, money hungry attorneys and no more bad debt collectors? If the Attorney General could enforce the Davis-Stirling Act, problems would go away since it would be a crime to violate the laws. Of course only those who really cared about serving their community would then seek election. If no one wanted to serve then their association could be dissolved and the common areas would be turned over to the city or county. -B. Stelter

RESPONSE: Oh, my. Not all HOAs are evil, not all boards are corrupt, not all lawyers are money hungry, and not all owners are angels. Moreover, a state agency will not produce utopia. Unlike slow moving, indifferent, state bureaucracies, HOAs are more responsive to the needs of their members, run lean and pass balanced budgets. HOAs have their flaws but most owners are generally satisfied with how they’re run. Also, governmental agencies are unwilling to assume the maintenance obligations for an association’s common areas.

Cabin #5. Although K.L.’s frustration is evident, there is a valid point being made, and it is usually resolved only through legal means which are generally costly. This makes homeowners feel impotent to change BOD actions. We found that having more owner involvement and presence at meetings is a good way to keep the BOD mindful of their duties and the fact that they represent everyone. Getting owners involved is no easy task; however, if they become aware that their “pocketbooks” are affected, they become more interested. -C.W.

Late Newsletter. You have us hooked Adrian….I searched my spam folder this morning in search of your newsletter fearing I’d missed it. Thanks for keeping it up, no matter when they appear. -Carey C.

RESPONSE: Sorry for the late arriving newsletter. We are going through a major network upgrade that has been a little bumpy.

Newsletter. Adrian, absolutely love your newsletters. BTW do you live in our HOA? it seems every issue we have you know more about it than we do!!!! -John M.

RESPONSE: Thank you for your kind words. I could say that I see all and know all but then all the conspiracy nuts would put tinfoil on their heads and bury me with emails.

-Adrian J. Adams, Esq

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Jun 06

Many times elections are decided by a single vote. Although the Inspector of Elections determines the outcome of the election (Civil Code §1363.03(c)(3(G)) a losing party may be unhappy with the results and demand a recount. The Davis-Stirling Act does not address this situation.

Although not binding on homeowner association elections, California’s Elections Code provides useful guidelines on how recounts may be handled. The following has been adapted from Elections Code §§15620-15634.

Written Demand. Any member of the association may demand a recount of the ballots provided (i) demand is made in writing to the Inspector of Elections within five days after the election results have been announced, and (ii) the member pays in advance for the cost of the recount. Monies advanced by the member shall be refunded if the outcome of the election is changed by the recount.

Recount Procedure. The recount shall be commenced not less than seven days following the request for the recount and shall be done under the supervision of the Inspector of Elections. The recount may be observed by members of the association. No election materials may be touched or handled by any person without the express consent of the Inspector of Elections and under the supervision of the Inspector.

Results Published. The results of the recount shall be reported to the board of directors and the membership and shall be recorded in the minutes of the next board meeting.

RECOMMENDATION: So as to minimize the potential for litigation, boards should adopt reasonable procedures for recounts similar to the above. Because Election Rules are operating rules, boards must send the proposed changes to the membership for review and comment.

EMAIL NOTICE
OF BOARD MEETINGS

QUESTION: Civil Code 1363.05(f) states that notice of meeting shall be given by mail to any owner who wants notice at an address requested by the owner. I wonder, can the meeting notice be emailed or only mailed?

ANSWER: Most boards give notice of meetings by posting the notice/agenda in a prominent place or places in the common areas. As you pointed out, members individually have the right to receive notice by mail at an address of their choosing. Civil Code 1363.05(f). Does “address” include an email address?

Email Address. Until recently, everyone would have said that a person’s address was the place where letters are delivered by an employee of the post office. In light of last year’s decision in Worldmark v. Wyndham Resort, that is no longer the case. The court expanded the definition of “address” to include a member’s email address. This was a decision involving the Corporations Code but if the court’s definition is carried over to the Davis-Stirling Act, members would have the right to demand that meeting notice/agendas be emailed to them at least four days in advance of the meetings. Associations could not refuse by arguing that they satisfied notice requirements by posting in the common areas.

RECOMMENDATION: Boards should assume the court’s definition of address applies to HOAs and give email meeting notice/agendas to those members who request it. It wouldn’t hurt to routinely give email notice to all members (in addition to posting in the common areas).

FINING THE BOARD

QUESTION: There has been a dilapidated BBQ grill sitting in the common area. The owner of the grill was told to remove it but it is still there. It seems to me as members we have the right to send a violation notice to the board and management company and fine them for non-enforcement. Is this something members can do?

ANSWER: No.

CORRUPTION EVERYWHERE

READER: Regarding rule changes and all generally oppressive actions by any board of directors anywhere . . . They can change rules, or do whatever they damn well please. The only way to stop them is to sue them. Davis-Stirling Schhhmirling . . . applicable law only becomes applicable when you purchase it. Even then it’s likely to be worthless as you’ll be fighting a battle of billable hours. Neither attorney will be concerned with winning. So you lose, and those elected to your board get away with whatever they want. Including your money, if they’re creative. -K.L.

RESPONSE: There is a solution to the problem you describe–sell your condo and move to a remote cabin in N. Dakota. Avoid all contact with people and you will find happiness.

-Adrian J. Adams, Esq

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