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.
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.
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.
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.
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.