Aug 28

QUESTION: We have a five member board. We have a six person finance committee. Four of the finance committee members are also board members. Does that present a conflict of interest?

ANSWER: It does not present a conflict of interest but it does create an Open Meeting Act issue. As provided for in Civil Code §1363.05(j), a board meeting:

includes any congregation of a majority of the members of the board at the same time and place to hear, discuss, or deliberate upon any item of business scheduled to be heard by the board, except those matters that may be discussed in executive session.

Any budget or finance matters discussed by the Committee will at some point be presented to the board for action. Accordingly, your Finance Committee meetings qualify as board meetings and need four-days notice to the membership plus the posting of an agenda.

MAINTENANCE DUTIES


QUESTION: If a new set of CC&Rs transfers maintenance responsibility and repair costs from the association to the owners, would it be legal?

ANSWER: Yes, it would be legal. Maintenance duties do not automatically follow ownership and can be reassigned by the membership via the governing documents.

Condominiums. In condominiums, members own air space plus an undivided percentage interest in the common areas. Even though all plumbing and wiring in the walls are owned in common, maintenance of these exclusive use common areas is typically assigned to unit owners. Civil Code §1364(a).

Planned Unit Developments. In PUDs with townhouse construction, members own their individual structures from the roof to the foundation and to the center of the party wall separating it from the next unit. Nonetheless, maintenance of the roof and exterior walls is typically assigned to the association even though it has no ownership interest in the structure. Assigning maintenance to the HOA should ensure timely and proper roof repairs (via reserve funds) and uniform paint colors on exterior walls.

Benefits the Whole. The California Supreme Court determined that “anyone who buys a unit in a common interest development with knowledge of its owners association’s discretionary power accepts the risk that the power may be used in a way that benefits the commonality but harms the individual.” The Court concluded that “the reasonableness . . . of a condominium use restriction . . . is to be determined not by reference to facts that are specific to the objecting homeowner, but by reference to the common interest development as a whole.” Nahrstedt v. Lakeside Village.

RECOMMENDATION: HOAs can and should amend their documents to assign or reassign maintenance duties in a manner that makes sense for their particular development. Since most CC&Rs are vague when it comes to maintenance, clearly defining those duties is one of the main benefits of a restatement of an association’s governing documents. Doing so eliminates ambiguities that frequently lead to costly litigation.

RESERVE EXPENDITURES


QUESTION: Does an expenditure from the reserve account require board approval?

ANSWER: Yes. Reserve accounts are given significant protections by the Davis-Stirling Act. Associations must set up bank accounts that are separate and distinct from their managing agent’s funds and separated into operating and reserve accounts.

Spending Restrictions. Boards may not spend reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain. Civil Code §1365.5(c)(1).

Borrowing From Reserves. Boards are allowed to borrow from reserves but are required to give notice of their intent to borrow by listing it as an item in the meeting agenda. The meeting notice must include the reason the reserve transfer is needed, some of the options for repayment, and whether a special assessment may be considered. If the board authorizes the transfer, it must issue a written finding recorded in the minutes explaining the reasons for the transfer, and describing when and how the money will be repaid to the reserves. Civil Code §1365.5(c)(2).

Two Signatures. Finally, the signatures of at least two board members or one officer who is not a member of the board plus a board member is required for the withdrawal of moneys from the reserve account. Civil Code §1365.5(b).

Summary. Transferring funds out of a reserve account is significant and requires board approval.

SMALL CLAIMS
COMMISSIONERS


In last week’s newsletter I said I didn’t think a person could refuse being assigned to a commissioner. Thank you to everyone who sent emails correcting this point. In addition to refusing a judge pro tem, parties CAN refuse a commissioner.

Section 259(d) of the Code of Civil Procedure provides that a commissioner has the power to “act as temporary judge . . . on stipulation of the parties litigant.” Where a party fails or refuses to stipulate, actions of a commissioner are void, as in excess of jurisdiction. Yetenekian v. Superior Court (1983) 140 Cal.App.3d 361. However, parties must object at their first opportunity in small claims court or the objection may be deemed waived, i.e., a stipulation may be implied by the parties’ conduct. Foosadas v. Superior Court (2005) 130 Cal.App.4th 649.

In addition, Code Civ. Proc. §170.6 allows replacement of any judicial officer (pro tem, commissioner, or appointed judge) if timely made.

FEEDBACK
Convicted Felon #1. Thanks for noting that the convicted felon may actually be doing the community a useful service. My experience is that willing co-conspirator/mismanagers can cause more financial damage than a single determined criminal. Also it seems that sex crimes have expanded to include situations many would be surprised by, so the president-felon may have been the victim of a particularly nasty divorce and pleaded out? -Tony V.

Convicted Felon #2. I agree with you that boards should pass an ethics policy. However, in the absence of an ethics policy, so far as I can tell a board member need not recuse themselves from a discussion in which they have an interest that varies from another board member when the board has not adopted Robert’s Rules (or similar) or an ethics/conflict of interest policy, and if it’s not in the governing documents. Am I missing something? -Glenn P.

RESPONSE: You’re scaring me with your comments. It looks like you’re saying that directors are free to be unethical absent a duly adopted ethics policy. If so, you are missing all the statutes and case law regarding fiduciary duties and self-dealing and the Business Judgment Rule and recusal. As many courts have already noted:

“It is well settled that directors of nonprofit corporations are fiduciaries. . . . We note that the duty of undivided loyalty applies when the board of directors of the association considers maintenance and repair contracts, the operating budget, creation of reserve and operating accounts, etc. Thus, . . . [directors] may not make decisions for the association that benefit their own interests at the expense of the association and its members.” (Raven’s Cove v. Knuppe)

Calif. Assn. of Realtors. Kudos for your spot on response to CAR’s Mr. Bjernefalt. From the perspective of a long time HOA board member, it is my experience that both good management and diligent boards’ make reasonable accommodations for members’ hardship situations. CAR’s position is self-serving, purely and simply. – M.B.

-Adrian J. Adams, Esq

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Aug 21

QUESTION: I am the president of our association. Three directors want to change the time of our board meetings but a fourth director opposes. Can we change it without her consent? Also we are not happy with this director because her grandson is always doing things like drugs and fighting on the property. She is always negative and affects the other board members and we would like to know if we can get her off the board.

ANSWER: When it comes to meeting dates and times, directors should be sensitive to the needs of fellow directors and accommodate schedules whenever reasonable. However, boards cannot be held hostage to the schedule of a single director–they can change their meetings to accommodate the needs of the majority. Your problem director can always attend by phone.

Removing a Director. So long as the dour grandmother meets the qualifications of a director, fellow directors cannot remove her from the board–only the membership can remove her. You can, however, hold hearings and levy fines against her for the behavior of her grandson. The other thing you might do is amend your bylaws to increase director qualifications and eliminate cumulative voting to make it easier to remove problem directors.

EMPTY SEAT

QUESTION: One of our board members quit. Do we have to seat the next person on the ballot tally who received the next greatest amount of votes in our recent election?

ANSWER: No. Unless your governing documents require you to (i) seat the next person on the ballot tally from your most recent election or (ii) hold a special election, the board appoints a replacement director. The board can choose anyone it wants to fill the seat, provided the person meets the qualifications of a director.

SMALL CLAIMS
COMMISSIONER
QUESTION: I believe you stated a pro tem was a lawyer acting as a judge in small claims court. Please explain the difference between a commissioner and a judge. Can you refuse to have a case heard by a commissioner?

ANSWER: A small claims commissioner is a step above a pro tem and a step below a judge. Instead of being volunteers who fill in from time-to-time, commissioners are paid a salary and hired full-time to hear small claims cases. I don’t believe you can refuse to have your case heard by a commissioner.

RECORDING A JUDGMENT
FOR FINES

QUESTION: Can an abstract of judgement be filed against an owner for fines imposed by the board of directors?

ANSWER: Yes, if done properly. Boards can record an abstract if they first go to court (small claims or superior) and get a judgment. The prohibition against recording liens that include fines pertains to assessment liens related to nonjudicial foreclosures. Civil Code §1367.1(e).

CONFLICT OF INTEREST

QUESTION: Our HOA president is a convicted felon and registered sex offender. He served 2 years in prison and is presently on probation until 2012. Over a 3-year period, $192,000.00 of our HOA funds have gone to a company that employs our president. We believe this is a conflict of interest. We submitted a complaint to the Attorney General’s Office but received a reply and they do not get involved in cases such as this. We are at our wits end.

ANSWER: Your options are limited. Although the Corporations Code states that boards may declare vacant the office of any director who has been convicted of a felony (Corp. Code §7221(a)), the felony conviction must occur after the director has been elected to the board. Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 CA2d 405, 424. To prevent someone with a prior conviction from serving on the board, associations must amend their governing documents. Your options related to his sex offender status are also limited. For more information, see Megan’s Law.

Insurance Issues. Having a felon on the board may create insurance problems which could result in the denial of coverage for some claims. Your board should contact the association’s insurance broker to find out if it negatively impacts your coverage.

Attorney General. As you already discovered, the Attorney General’s Office will not get involved in most HOA disputes. The AG’s jurisdiction over associations is limited to enforcement of the Corporations Code. Since the Davis-Stirling Act is part of the Civil Code, most HOA issues fall outside the purview of the Attorney General’s Office.

Conflict of Interest. Paying $192,000 to the president’s employer is clearly a conflict of interest. As such, it requires the president to disclose the conflict and then recuse himself from any discussions or votes involving his company. If he has done that, your president has complied with the law. If the president is steering work to his company, you have a problem both with the president and with fellow directors who are allowing him to influence their decisions. At that point, the membership should recall the president and any directors enabling the president’s unethical behavior.

RECOMMENDATION: If your insurance is not affected by your president’s status as a felon, and he has disclosed his conflict of interest and recused himself from all matters involving his company, and the association is receiving proper value for the monies paid to his company, and the membership is happy with the president’s performance as a director, then you don’t have reason for concern. You should work with him for the betterment of the community. If the situation proves too uncomfortable for you, you may want to quietly step off the board and serve again when the president is no longer on the board.

INELIGIBLE CANDIDATE


QUESTION: What would happen if just before they count the ballots for board elections someone points out that some of the candidates are not qualified? Isn’t it the management company’s responsibility to verify candidate qualifications? Do they just eliminate those candidates or do they invalidate this election and start over?

ANSWER: It is not the management company’s responsibility to verify candidate qualifications unless the board specifically assigns that task to the company. However, once a candidate’s qualifications have been challenged, the Inspector of Elections must investigate and make a decision as to whether a candidate is qualified. Civil Code §1363.03(c)(3)(H).

A New Election? Whether the election proceeds or not would also be a decision for the Inspector to make. Normally, the election would proceed. If there are three open seats and one disqualified candidate out of five, the Inspector could (and should) proceed with the election. If there are three disqualified candidates out of five, the election could still proceed with the two qualified candidates being elected and a third person appointed by the board to the empty seat. The decision to proceed or start over would be a judgment call that factored in the circumstances surrounding the disqualifications, the cost of another election, the availability of candidates, etc.

FEEDBACK


Senator Corbett. Regarding SB 209, Senator Corbett was also the author of flawed SB 561. She doesn’t seem to have a very good understanding of how her legislation affects the HOA community. -Pat C.

Senator Corbett #2
. I tried to send Ellen Corbett an email on her lack of understanding concerning HOA issues but the response was “You are not in my district – contact your rep.” Can you tell us how to reach this person (who shouldn’t be representing anyone!)? -Angela D.

RESPONSE: Ms. Corbett’s contact information is:

Senator Ellen Corbett
State Capitol, Room 313
Sacramento, CA 94248-0001
(916) 651-4010

CAR’s Legislation. As a large-scale, onsite manager (going on 20 years), I applaud your response to Mr. Bjernefalt of CAR. Anyone who has been in this industry for any length of time could read through CAR’s rhetoric and notice the obsequious play on sympathy for the downtrodden member who has suffered some form of malady. You are quite correct in that management would normally take care of any special circumstance that comes up. I’ve been following and enjoying your blog now for some time and have never responded, but this latest bit of hogwash from CAR was just too much. -Rick A.

-Adrian J. Adams, Esq

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Aug 14

QUESTION: At a recent board meeting, a director questioned the authority of the architectural committee to send out violation notices. He felt it was reserved exclusively to the board. Others argued that the board had given the committee that authority and owners could always appeal their fines to the board. Which is it?

ANSWER: Door number two. Boards can delegate the task of issuing violation notices, holding hearings and imposing fines. Architectural violations can be allocated to the Architectural Committee or they can be assigned to a Rules Committee to handle all violations. The board can then hear appeals.

Delegating Duties. By statute, boards are given authority to delegate many of their duties to committees, provided the committee’s activities are under the ultimate direction of the board. Corp. Code §7210. There are some things that boards cannot delegate. Nondelegable duties include: (i) attending meetings and voting on motions, (ii) filing vacancies on the board, and (iii) staffing executive committees.

RECOMMENDATION: Because there may be disagreement by some lawyers on this issue, boards should consult with and follow the advice of their association’s legal counsel.

NOTICE OF
ANNUAL MEETING


QUESTION: Board meetings require posting, however the annual meetings do not, that is how we interpret the Civil Code. Although it is great to post the annual meeting, it is not required by law. Do you agree?

ANSWER: I agree. Boards can, but are not required to, post notice of annual meetings in the common areas. The requirement to post applies to board meetings. Annual meeting notices must be given by one or more of the following methods: (i) personally, (ii) electronically, or (iii) by mail or other means of written communication addressed to members at the addresses appearing on HOA’s books. Corp. Code §7511(b). Even though posting membership meetings in the common area is not required, it is a good idea.

BOARD QUORUM AT
ANNUAL MEETING

QUESTION: Is a board quorum needed at the annual meeting of the homeowners in order to conduct business, e.g., elections, nominations from the floor, etc.?

ANSWER: No, a board quorum is not needed at membership meetings. A quorum of directors is needed for board meetings and a quorum of members is needed for membership meetings. The President, however, needs to be present to conduct membership meetings (or someone in the President’s place).

CAR’s RESPONSE TO
RENT RESTRICTION ARTICLE


Following is a rebuttal to our article about legislation sponsored by the California Association of Realtors (“CAR”).

Mr. Adams,

CAR crafted the foundational language for SB 150 for the safeguarding of the rights of all owners in CIDs. The bill had nothing to do with protecting REALTOR’S® future sales of condos to investors. Cases in point:

• A Veteran condo owner is called to duty overseas and must rent out his townhouse while serving his country. (Force him to sell?)
• Your grandmother becomes ill, moving to long-term care facility and needs income from renting her mobile home to continue paying her bills (Force her to sell?)
• A senior dies wanting to leave his/her condo to children who already own a home. (Force the estate to sell?)
• Bob and Mary, looking toward retirement, buy single-level patio home in a PUD to rent out until they are ready to move in. (Force them to sell?)
• An investor buys a unit out of short-sale. The former owner had not paid HOA dues for two years and is $7,000 in arrears; he files bankruptcy. The investor buys it and begins paying dues in full and on time. (Force her to sell?)
• Dozens of other scenarios … but consider this: You own units in an HOA where bad jobs and housing markets have forced over 15% of your owners to default on their loans. Many stop paying monthly dues. Due to a critical shortage of revenues, your Board notices you that to avoid bankruptcy, it is imposing a $2,500 assessment on your and every other unit in your complex. Your regulations say that only owner-occupants can buy, but due to the poor financial health of your Association lenders will not loan to first-time buyers with low down payments. Perhaps you would then welcome investor-owners to purchase who would pay their HOA dues in full and on time.

In crafting what would become SB 150, CAR and the California Legislature, took great care to protect the autonomy of each and every HOA. HOAs may still amend governing documents to exclude all but owner-occupants if they believe that is what is in the best interest of their memberships. Each new prospective buyer can read governing documents and simply decide not to buy if that is a problem for them. But what the HOA may not do is to strip an owner of the right to rent if that right existed when he acquired title to the property. -Sten Bjernefalt, Member C.A.R. Housing/Common Interest Development Committee.

RESPONSE: The fact that CAR would insert itself into another industry and over the objections of that industry’s three trade organizations (CAI, CACM & ECHO) push through legislation that damages that industry does not speak well of CAR’s professionalism. There is no logical conclusion to reach but that it was in CAR’s own self-interest that they pushed through unwanted legislation which stripped away the rights of a majority (and often a super-majority) of homeowners (the amount needed to amend CC&Rs) to protect themselves from the harm created by excessive rentals in their developments.

Moreover, the reasons you cited for supporting the legislation are all routinely dealt with through hardship exceptions. What CAR did was appalling, and the negative consequences to many HOAs will be significant. FHA, Fannie Mae, banks and insurance companies all red flag developments with excessive rentals and either raise rates or refuse to do business with them. Smart buyers will steer clear of high rental developments. This will put marginal HOAs into a downward spiral with no chance at recovery thanks to CAR’s meddling. How does that possibly “help” homeowners? -Adrian Adams

HOW BAD BILLS
BECOME LAW


The reason why Senate Bill 209 was not “fixed” before being sent to Governor Brown is that it was jammed through both houses of the Legislature within 48 hours (July 5-7).

Warnings to Corbett. Senator Corbett plunged ahead despite repeated cautions about the conflict in law her bill created and its negative impact on HOAs. Senator Corbett did not heed the warnings. CAI-CLAC’s lobbyist Skip Daum was in cell phone contact with her staff on the floor of the Assembly as this was occurring but Ms. Corbett was too busy jamming it through the legislature to consider the bill’s glaring flaws.

Governor Alerted. Skip then alerted Governor Brown’s legal staff about the problems and recommended a veto, but the Governor wants to be seen as an “environmentalist” and signed the bill anyway. Knowing the bill was seriously flawed, Governor Brown issued a “Signing Message” acknowledging the defects and the need for corrections.

Follow-Up. Efforts to fix the statute before HOAs become entangled in litigation were immediately commenced as Senator Corbett’s staff contacted Skip for draft language. Skip Daum is working to put language in another bill by September 9 so it can be sent to the Governor for signature.

RECOMMENDATION
. With Governor Brown signing everything that hits his desk, including the flawed rental legislation pushed by CAR, I have no doubt the HOA industry will get hit with more bad legislation. If boards aren’t already doing so, they should add a line item to their HOA budgets to contribute to CAI’s Legislative Action Committee. Even if the amount is modest, HOAs need to back the Committee’s efforts to support good legislation and oppose bad legislation.

-Adrian J. Adams, Esq

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Aug 07

QUESTION: What is the individual unit owner’s liability/responsibility when the HOA takes out a bank loan?

ANSWER: HOA bank loans are secured by a special assessment against the membership. Individual owners are responsible for their portion of the assessment. However, their obligation could expand if other members become delinquent, are foreclosed upon or declare bankruptcy. When that happens, the association may have no choice but to increase the burden on everyone via higher dues or special assessments to make up the lost revenue.

RECORD DATE

QUESTION: We sent out the annual meeting package, including ballots, in a timely manner. During the time between the mailing and the meeting, a property was sold. Is the prior owner allowed to vote? What happens to the secret ballot they returned? Should the new owner get a ballot?

ANSWER: Normally the owner on record with the association when ballots are mailed has the right to vote. That date is known as the “record date” for the election. As provided in the Corporations Code, the record date is set by the board to establish who is a member as of that date and, therefore, eligible to vote. Corp. Code §7611. Typically, the record date is set a few days to a week in advance of the mailing of the ballots. This allows time for preparing election materials, putting eligible voter labels on ballot envelopes, and printing a voter list for the Inspector of Elections.

Automatic Record Date. If a date is not selected by the board, then the date ballots are mailed becomes the record date. Those who become owners after the record date are not eligible to cast ballots in the pending election (but would be eligible to vote in subsequent elections).

Suspended Voters. It should be noted that members who are eligible as of the record date can still have their voting rights suspended.

NATHALIE ROSS


I am pleased to announce that Nathalie Ross has joined Adams Kessler PLC as Director of Business Development.

Experience. Nathalie has been in our industry for 14 years and is a certified paralegal in both California and Nevada. Prior to joining Adams Kessler, she was involved in sales and marketing for two of the largest law firms in Nevada as well as operations of a community management company.

Professional Activities. Nathalie served as the 2010 President of the Nevada Chapter of the Community Associations Institute and is an active member of CAI chapters throughout California.

Duties. Nathalie will be working with our existing clients as well as new ones on quality control and follow-up, coordinating proposals and interviews, client interaction, as well as industry functions and educational events. If your association needs a proposal for legal work, please contact Nathalie at nathalie@davis-stirling.com.

RENTAL RESTRICTION
FEEDBACK

I’m sorry I could not print everyone’s feedback on rent restrictions–there were too many. Following are a few:

Insurance Issues. Senate Bill 150 has the potential to affect homeowner association insurance premiums. Granted we’re not talking about every association since current restrictions will be grandfathered. Most insurance companies have caps on rental percentages. The caps are anywhere from 25% to 49% rented. If rental percentages go beyond these caps and insurance companies do not adjust their guidelines, HOAs may have to start paying apartment program rates which are above what condo rates are. -Patrick Lyons, Operations Manager, Socher Insurance Agency.

RESPONSE: Unfortunately, the California Association of Realtors was not thinking of the financial health of community associations when it sponsored the legislation; it was thinking of the financial welfare of its Realtors. By putting its own special interests ahead of homeowners, CAR took away the right of owners to shield themselves from higher insurance premiums, higher administrative costs, rules enforcement problems and lower property values. The most serious side effect is that many condominium associations will be denied access to funds needed to refinance and sell their homes–a shortsighted consequence of CAR’s meddling. The bill was authored and coauthored by:

Senator Lou Correa
State Capitol, Room 5052
Sacramento, CA 94248
(916) 651-4034

Assemblyman Steve Knight
State Capitol
Sacramento, CA 95814
(916) 319-2036

Amendment Deadline. My HOA is currently voting to amend our CC&Rs to add a rental restriction. None exists now. If it passes and is recorded before January 1, 2012 how am I affected? -Sharon B.

RESPONSE: If the amendment is approved by the membership and recorded by December 31, 2011, the restriction will be enforceable against all current owners as well as all future owners. If the amendment is approved and recorded after December 31, it will apply to future owners only.

MORE FEEDBACK

Electric Charging Station #1. So, if Senate Bill 209 has a major flaw, why did the governor sign it? Shouldn’t it have been fixed before he signed it? The signing statement is not law. The legislature may not return to this item for months, years, or ever; but in the meantime, HOAs are stuck with this horrible law that will devolve into expensive litigation. A multi-million dollar building could go up in flames, but the legislature thought a million dollar policy was sufficient? Who pays for the electricity? Are the tree-hugging, pot-smoking Prius drivers going to install their own meters at their own expense? -Stephany Y.

Electric Charging Station #2. Regarding the major flaw with SB 209, why wasn’t this bill amended before the proposed law was signed? It seems to me that too many legislators are proposing bills that affect homeowners associations when they don’t have a clue about what the impacts are. -Pat C.

Carbon Monoxide Detector #1. Under SB 183, are the installation of carbon monoxide detectors in rental units required forthwith, or only upon the sale of the property thru a disclosure statement? -Roger L.

RESPONSE: All dwelling units, not just rentals. The detectors must be installed in all single-family homes by no later than July 1, 2011 and in condominiums and townhomes by no later than January 1, 2013.

CO Detector #2. When you wrote “every dwelling unit” did you mean every dwelling unit or just transferred properties? -Flavia B.

RESPONSE: Every dwelling unit. It should be noted that the State exempted itself from regulation: “’Dwelling unit intended for human occupancy’ does not mean a property owned or leased by the state, the Regents of the University of California, or a local governmental agency.”

CO Detector #3. I have been a California resident and homeowner for 70 years. Now the blanking government is telling ME, that I have to have a carbon monoxide detector in my personal home! And yes it only costs $25, but I will be fined if I don’t have one. HELLO!? -M.S.

Small Claims. I have been told that if on arrival for a hearing in small claims it is found that the case is to be heard by a pro tem there is an opportunity to request that the case be postponed until a Small Claims Commissioner is available. -Gordon C.

RESPONSE: Yes, you can refuse to waive your rights and wait for the next available commissioner.

CPA Peer Review. Your article states that the association’s CPA should “inquire if the HOA has performed an annual inspection” of the major components, then references Civ. Code §1365.5(e) as the source for that requirement. Doesn’t the statute say “review” annually, not “inspect”? -Bob F.

RESPONSE: Good catch. The article should have said “review” annually and inspect every three years.

-Adrian J. Adams, Esq

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