Apr 29

QUESTION: We have a director who is under the impression he is the only one who can sign checks because he is the treasurer. Without board approval, he has called special meetings of vendors, refused to pay vendors and has even torn up a large check in front of a vendor. He has told vendors that he will refuse to sign any more checks until they do what he wants. They now refuse to work. This is creating chaos for the association. The treasurer threatened to file a lawsuit if anyone tries to remove him from office. What can we do?

ANSWER: Your treasurer is acting outside his scope of authority. Treasurers do not have unchecked power over the association’s finances. They answer to the board. Treasurers do not have the right to threaten vendors and tear up checks nor do they have sole authority to sign checks.

Duty to Sign Checks. If the board authorizes payment to a vendor, the treasurer has a duty to pay the vendor. He cannot withhold funds just because he disagrees with the board’s decision. If cash flow is a problem, the treasurer can put a temporary hold on a check until funds become available. If the treasurer (or any other director) discovers circumstances that would cause the board to reconsider payment to a vendor, that director should bring the matter to the attention of the board. Absent that, the treasurer must pay the association’s bills.

Removal from Office. The treasurer holds his office at the pleasure of the board and can be removed by the board at any time with or without cause. Removing your treasurer from office is not by itself sufficient cause for him to file a lawsuit. That does not mean he won’t sue. If he does, he is going to have a very difficult time explaining to a court why he should be reinstated since the appointment of officers is discretionary with the board (unless your governing documents state otherwise). If your treasurer is foolish enough to file a lawsuit, he would be open to a counterclaim for any damage he caused the association for his unauthorized actions as treasurer.

RECOMMENDATION: If the board remains silent, it could be seen as an endorsement of your treasurer’s bad behavior. That could put the association at risk for litigation from vendors. You should work with your attorney to create a paper trail of written demands that your treasurer cease acting outside the scope of his authority. If he refuses to fall into line, remove him from office. If you’ve already made written demands which he has ignored, immediately remove him from office.

POOL VOLUNTEERS


QUESTION: A board member has volunteered to watch children at the swimming pool. She has encouraged other volunteers to do the same. Although I commend her volunteerism, I am concerned she is subjecting the association and herself to potential liability.

ANSWER: There is always potential liability whenever volunteers are involved in any HOA activity. If volunteers watch the kids and a child drowns, the lawsuit would say something to the effect that, “The association had volunteers watching my children and, but for their negligence, my child would not have drowned.” However, forbidding people from volunteering has its own risks. In the event a child drowns, the lawsuit would now read: “My child would not have drowned if you had not forbidden people from volunteering to watch him!

Business Decision. As you can see, lawyers can spin a tragedy any way they want. Since you can’t entirely insulate yourself from potential litigation, the board must make a business decision as to which course of action produces the least risk. If children are out of control and there is a foreseeable risk of injury, allowing volunteers to monitor the pool may be the better course of action because it lowers the risk level. You would still want signage for “No Lifeguard on Duty” and disclaimers in your newsletters that parents must provide responsible supervision of their children at the pool.

RECOMMENDATION: Work with your insurance agent and your association’s legal counsel on this issue. The association is in a much better position to defend itself if it can show that the pool is regularly inspected and maintained, that all safety equipment is in place, that proper signage is posted, and that rules are enforced. If you opt for volunteers to help in that effort, you should make sure they are covered by the association’s insurance.

AB 2273 APPROVED BY
HOUSING COMMITTEE

Thank you to everyone who wrote letters in support of AB 2273. This is the bill that requires recordation of foreclosure sales within 30 days so associations can timely receive assessments from the new owner.

On Wednesday morning, the Assembly Housing & Community Development Committee, on a unanimous bipartisan vote of 7-0, passed AB 2273 out of Committee.

CAI’s Legislative Advocate, Skip Daum, gives great credit to the more than 550 persons who wrote letters to the Housing Committee in support of the bill. The bill now passes to the Assembly Judiciary Committee for another hearing as early as next week. We will keep you informed of the bill’s progress.

FEEDBACK


Pool Covers #1. I concur with the comments from Socher Insurance. The main objective is to have a good risk management handle on pools and pool covers. -Carol Fulton, LaBarre/Oksnee Insurance Agency

Pool Covers #2. Insurance companies sometimes impose prohibitions or requirements which are not based on law, but those who require more than the law does tend to be in the minority–so shopping tends to cure that problem. -Tony Verreos, Verreos Insurance Agency

Pool Covers #3. Great info on pool covers. We come across them from time-to-time when conducting reserve studies. -Les Weinberg, Reserve Studies Inc.

Pool Covers #4. I found this information most helpful. I am wondering if the same would be true of a spa cover? Many spas use a floating bubble type cover which is lightweight and easily removed and reinstalled. They can be rolled up when not in use and stored on the pool deck near the spa. These bubble type covers will not support the weight of a child, though most spas are not open to children. I would appreciate any further information you may have. -Diane R.

RESPONSE: The same rules for floating pool covers likely apply to floating spa covers. Check with the agency that oversees pools and spas in your county and then diligently follow their regulations.

PERSONAL NOTE: Friday I played in the annual CAI Coachella Valley Golf Tournament in Palm Springs. My team was terrific and the weather perfect. I think I could get used to playing golf. -Adrian Adams

Adams Kessler PLC
“Legal solutions through knowledge, insight and experience.”
When your association needs legal assistance, contact us at (800) 464-2817 or info@adamskessler.com.

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Apr 22

I received a number of comments about pool covers. Following are a few:

#1. Last week a reader recommended pool covers but I believe an association cannot use covers for their pools–only individual homeowners. -Dan F.

#2. California doesn’t allow HOAs to have pool covers because our pools are considered commercial. Please tell me I’m wrong. -Sam M.

#3. Regarding pool covers saving costs, what if your insurance agent requests that the association NOT use a pool cover for liability reasons? -Ann H.

RESPONSE: Jeff Theders, President of Aquatic Balance, Inc. steered me to information about tracked, anchored and floating pool covers–each with different safety regulations. “Floating covers” seem to cause the most concern. Since they are designed to float on the water, they can collapse under the weight of a child, allowing the child to become trapped under the cover and drown. As a result, pool covers are regulated.

Regulations. Orange County, for example, allows floating pool covers under the following conditions:

  • The pool must be segregated from all dwelling units by an approved fence or enclosure.
  • The pool is under the supervision of responsible persons who have sole access to the pool area when it is not open for use. The pool area must be locked to prevent any usage of the pool when the cover is placed on the pool water. The pool may not be reopened for use until the responsible person removes the pool cover and properly stores it.
  • The pool cover, when not in use, must be rolled up and stored at least four (4) feet from the pool (see informational bulletin).

Associations with pool covers should check the regulations in their own counties.

Insurance Issues. Patrick Lyons, Operations Manager for Socher Insurance reported that none of the carriers he contacted have ever had any issues with pool covers. Insurance carriers are concerned with pool safety and that includes making sure pool covers are properly installed and regulations followed, pools are fully fenced with self-closing/locking gates, pool rules are in the open, depth markers are clearly marked on the top deck (not on the inside of the pool), a shepherd’s hook and other general life safety equipment is readily available and the pool drain has been approved per the Virginia Graeme Baker Pool and Spa Safety Act.

RECOMMENDATION: Associations with pool covers or those who want to add them should:

  1. Contact your insurance broker to make sure there aren’t any policy exclusions related to pool covers;
  2. Seek approval from appropriate regulatory agencies;
  3. Follow applicable safety regulations;
  4. Hire licensed, experienced pool operators to maintain your pool and equipment; and
  5. Have your insurance carrier inspect your pool, and then implement any safety recommendations made by the carrier.
AUTHORIZED SIGNERS

QUESTION: Our bylaws state that the president, vice-president and treasurer have check signing authority and require two signatures on all checks written. Can the board authorize other directors to sign as well?

ANSWER: Other directors can sign checks provided (i) your bylaws do not limit signers to only the president, vice-president and treasurer and (ii) the board approves the additional signers.

CONFLICT OF INTEREST?

QUESTION: I am the manager of an association and my husband is on the board. Is there a conflict of interest?

ANSWER: There is nothing illegal with the arrangement. However, potential conflicts of interest arise whenever a director is sleeping with the manager. As long as your husband discloses the relationship and recuses himself from any matters involving you (raises, disciplinary actions, etc.), he can continue on the board and you can continue to manage the property.

Personal Attacks. You should be aware that someone with an agenda (or who just likes to stir up trouble), will make personal attacks against you and accuse the two of you of all manner of crimes and misdemeanors. If you are willing to put up with the nonsense, you can both continue in your positions–just be careful not to allow any hint of impropriety.

FEEDBACK

Getting Out #1. I can’t stop laughing. THANK YOU for starting my Monday on such a positive note. -Helene S.

Getting Out #2. Still laughing and ready to climb the wall to get out of the association. -Gloria F.

Stray Cats. It’s spay, not spade unless they are burying the poor kitties! -Cynthia C.

Stray Cats. An owner in our HOA took in a stray dog rather than send it to the pound to be reclaimed. She spayed the dog and gave it a good home. Four months later the original owner saw her walking the dog and called the police for dog napping. The dog was a breeding champion pedigree. She was given 30 days suspended sentence and ordered to pay $700 for each unborn future puppy (estimated at 15 pups) for a total of $10,500 plus court costs. -Vince B.

PERSONAL NOTE. I spent the weekend visiting clients in Sacramento and attending CAI’s Legislative Action Committee meeting. The Committee identified Assembly Bill 2273 as legislation that would help HOAs remain solvent. Currently, many banks are foreclosing on properties and then refusing to record deeds so as to avoid paying HOA assessments. This increases the financial strain on associations, forcing existing homeowners to pay higher assessments.

AB 2273 requires recordation of a sale within 30 days of the sale. There will be considerable opposition from the banking industry. That is why we need your help to pass this bill. The vote is Tuesday and your letter to the Housing Committee is needed ASAP. Please sign and fax this letter to (916) 772-3781.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

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Apr 15

QUESTION: A buyer can’t obtain financing because the lender requires a lower delinquency for our association. If we had one less delinquency, escrow could close. The buyer wants to pay off one of the delinquent owner accounts to move the escrow along. Can this be done?

ANSWER: Yes, it can be done. It makes no difference to the association from either an accounting or income tax standpoint who pays a member’s assessment or delinquency fees. The HOA merely applies the payment to the delinquent member’s account. The best approach is for the association to put the buyer together with one of the delinquent owners (with that owner’s permission) and let money change hands between them. The recipient of the gift then pays off his delinquency.

Thank you to William Erlanger, CPA of Levy, Erlanger & Co. and Steven Schonwit, CPA of the Schonwit Consulting Group for their assistance with this question.

TWO VICE-PRESIDENTS

QUESTION: Our board elected two vice-presidents, in addition to a President, Secretary and Treasurer! Is it legal to have two Vice Presidents????

ANSWER: There is no need to speed-dial the police. It is perfectly legal to have two vice-presidents. It is not unusual for boards to designate one director as “1st Vice-President” and another as “2nd Vice-President.” When the President can’t attend, the 1st VP runs the meeting. When the President and 1st VP both miss a meeting, the 2nd VP steps in. (See Robert’s Rules of Order, 11th edition, pp. 457-458.)

GETTING OUT

QUESTION: I would like information about how to get out of my association.

ANSWER: Option #1. Wait until dark, climb the perimeter wall and run. Option #2. Call a Realtor and list your property at below market prices for a quick sale. Disclose everything. Smile and tell buyers how much you love your association. Option #3. Dissolve your association (probably not a viable option).

FINANCIAL REPRESENTATIONS


QUESTION: Our CPA wants me (as president) to sign a management representations letter for his review of our annual financial statement. It contains statements about our accounting policies and procedures but I have no knowledge about these–our management company handles it all. Both the CPA and our manager tell me to sign it because it is “just a form letter” and says “to the best of my knowledge & belief.” Do I really have to sign this?

ANSWER: If you agree with the representations in the letter, you should sign it. If you’re uncertain, you should investigate them until you are satisfied.

Financial Statements. Associations with a gross income exceeding $75,000 must annually have a CPA prepare a written report of the financial condition of the association. The CPA’s examination of the “financial statement” must be completed and distributed to the membership within 120 days of the end of the association’s fiscal year. Civ. Code §1365(c). Finances are either audited or reviewed, depending on the level called for in the association’s governing documents. If your documents are silent, the Davis-Stirling Act calls for a review.

Representations Required. As part of the review process, CPAs require a signed representations letter describing the management practices of the association. “Management” includes board members. The letter is one of the steps CPAs must follow to satisfy the review and auditing standards issued by the American Institute of CPAs. (See sample representation letter recommended by Thomson Reuters in their CPA’s Guide to Homeowners Associations.)

Signatures. Typically, the signatures of two board members (usually the president and treasurer) and the manager are required. The representations are to the best of the knowledge and belief of the signers. Even though the financial statement is the association’s, the manager signs because he/she is the primary source of information in the statement. If directors refuse to sign, the CPA issues a draft report instead of a final signed statement.

RECOMMENDATION: Boards should be familiar with the representations in the letter. When associations are defrauded, it is usually because boards delegate too much financial authority to one person (a director or the management company). It’s always the “trusted” person who has the opportunity to embezzle funds.

For their assistance with this question, thanks goes to Ronald Stone, PhD, CPA who teaches at the College of Business and Economics at Cal. State Northridge, and Creighton Tevlin, CPA who specializes in HOAs.

FEEDBACK

Polar Bears: It isn’t just a matter of heating the pool; the pumps to circulate the water can also be very costly. Filters and maintenance also count. The easiest saver for any pool is a pool cover which reduces heat loss, water loss and chemical loss. -Connie M.

Stray Cats. There used to be a cat committee at our association with members who would sit in the forest and meadows for hours to capture cats, have them spade and find homes for them. What a noble contribution to the feline world. -Patty F.

Death Sentence. We were home to a momma raccoon and her babies who was only there to eat the food that was left out. One homeowner was feeding them until she learned that the HOA would be trapping the animals and that once trapped they would be killed. Her compassion shifted when she saw she was providing a death sentence. Once she stopped, the raccoon family moved on. -Paul C.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

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Apr 08

QUESTION: We have a lady who feeds many stray cats in the common areas. Because she leaves out food, it attracts possums, raccoons and rodents. She totally ignores our letters. What can we do? Can we fine her? She is creating a dangerous environment.

ANSWER: You can fine her under the nuisance provision of your CC&Rs, provided the association has a published fine schedule and she is given due process. Another consideration is to bill her for any increase in pest control costs the association incurs as a result of her behavior. The costs could be charged as a fee or, if your documents allow, a reimbursement special assessment (the difference affects collection efforts). Remember, however, that if the fees end up in court, you must have sufficient evidence to convince a judge that the rat, possum and raccoon activity is the result of her behavior and not related to other factors. As a practical matter, if there are “homeless” cats that are hungry, people will feed them, whether it is this particular woman or others. You may want to work with pest control to trap the cats and remove them to a shelter. Under the law of unintended consequences, removing the cats may allow the rodent population to increase, so you should set traps for them as well.

POLAR BEARS

QUESTION: We have a swimming pool that is unused by the many old people in our building. When I bought my unit 20 years ago, I was told that the swimming pool heater was always on from April until October. This has always been the policy. The old people who control the board, do not want to do this, thereby keeping the pool heater off until close to June. Can this be done?

ANSWER: The old people on your board may be helping Al Gore save polar bears. If not, it could be a business decision by the directors to save money. Boards are elected by the membership to oversee the common areas. One of their duties is to weigh costs and benefits when it comes to operational issues. In other words, boards can weigh the cost of heating the pool against the benefit received, i.e., the number of people who use the pool. Why should members pay higher dues to heat the pool if only one person benefits?

Litigation. The courts have already determined that boards, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, have the authority to exercise discretion within the scope of their authority when it comes to maintenance issues. It’s called “judicial deference.” Lamden v. La Jolla Shores. Thus, if you litigated the issue, you would likely lose.

Alternatives. You do, however, have recourse. You and others who are like-minded can run for the board and, if elected, turn on the pool heater. An alternative solution is the installation of a solar heating system. If you can find a reasonable means of funding the installation, you could have a year-round heated pool without the costly heating bills.

LOVE IS IN THE AIR

QUESTION. We have unmarried owners of separate units who both serve on the board. They have fallen love and plan to marry. Can they continue to serve on the board after they are married?

ANSWER: Provided there are no restrictions in your governing documents, a husband and wife can serve together on the board. However, you may want to advise them to first seek marriage counseling or put a divorce lawyer on retainer.

MORE FIDELITY BOND
FOLLOW-UP

QUESTION: If the association is named as additionally insured on the management company’s fidelity bond can it make claims against the bond? Does the management company use a single bond or do they take out separate bonds for each HOA?

ANSWER: As a reminder, a fidelity bond is a type of insurance that protects a business from losses resulting from the dishonest acts of its employees. Depending on the carrier, associations can be added as “Joint Loss Payees” on a management company’s bond. If the insurer agrees, it will pay jointly to the HOA and the management company in the event of a covered loss.

Multiple Bonds? It is unlikely a management company could buy a separate bond for each association. Instead, the carrier would issue a single bond covering the management company and all of its clients.

Coverage Limits. The problem with a single bond is the coverage limit. Is it high enough to cover all of the company’s associations? As noted last week, Fannie Mae and Freddie Mac require coverage of 100% of an association’s current reserves plus three months of assessments. How would a board know that the management company’s bond was sufficient without full financial knowledge of the reserves and assessments of all the associations the company managed? If the management company has a million dollar bond, a small portfolio of large associations would easily blow past that limit, thereby leaving all associations at risk and violating Fannie Mae requirements. Moreover, the bigger the management company, the bigger the problem.

Principals Not Covered. Another problem with traditional management company policies is that principals of the company are normally not covered by their bond since principals cannot insure against your own misconduct, only that of their employees. That puts associations at risk if the owner of the company is the one embezzling funds.

RECOMMENDATION: The best approach is to have a fidelity bond in the name of the association with a “managing agent rider” extending coverage to the dishonest acts of the management company, including the principals. As the first named insured and policyholder, the association would then have the right to submit a claim, control coverage limits (which are not shared with other associations) and receive notification in the event the policy is canceled or modified.

Thank you to Patrick Prendiville of the Prendiville Insurance Agency and Timothy Cline of the Timothy Cline Insurance Agency for their assistance with this question.

Adrian J. Adams, Esq.
ADAMS KESSLER PLC

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Apr 01

QUESTION: Can homeowners use an online petition such as www.GoPetition.com to recall the board?

ANSWER: Your question raises two issues. First, just to be clear, petitions cannot be used in place of secret ballots to recall a board. Petitions can only be used to call special meetings of the membership. Second, just as California does not recognize electronic petitions for ballot initiatives, I don’t believe homeowners can use them as a substitute for paper-and-ink petitions to call membership meetings.

Verification of Signatures. The Corporations Code provides that special meetings of the membership can be called by 5% or more of the members. Corp. Code §7510(e). The request must be in writing. Corp. Code §7511(c). Since only members can sign petitions, associations have the right to verify the signatures. With paper-and-ink petitions, members sign their names in their own distinctive handwriting styles. As such, signatures cannot easily be forged and associations can readily verify them.

Electronic Signatures. Electronic signatures, on the other hand, are easily forged by a petitioner plus anyone can “sign” a petition (children, non-member spouses, tenants, etc.) with the click of a mouse. Moreover, the purported signatures cannot readily be verified by management, staff or Inspectors of Election. The law requires that reasonable measures be in place to verify that the sender of an electronic message (or signer of an electronic petition) is a member of the association purporting to send the transmission. Corp. Code §21. While safeguards could be created by an association for petitions it generates, such measures would be difficult to establish when the petitions are produced by other parties.

OPINION: At some point in the future, electronic petitions may become acceptable to California for public ballot initiatives and corporate petitions. Until that happens, paper-and-ink is the only acceptable format when members petition a board for a special meeting to recall the board, amend governing documents, invalidate a rule change, etc.

REQUEST FOR PROPOSAL

Request for Proposal. Too often, large maintenance projects such as roof replacements, copper repiping projects, painting & waterproofing projects, etc., start with a “Request for Proposal” (RFP) from the board to various contractors. Boards ask contractors to propose how they would repair the association’s roofs or paint their buildings. Each contractor then submits a proposal based on his own approach to the project. As a result, the bids can vary significantly in the quality and quantity of materials used and how they are applied. That leads to large disparities in project pricing. Boards then pick a bid not realizing they may be selecting an expensive application of a shoddy product by an inexperienced contractor with little or no insurance and meaningless warranties. This could have serious legal consequences for the association (and the board).

Request for Bid. The best method for obtaining true bids is by using a “Request for Bid” (RFB). With an RFB all vendors are provided identical specifications describing the scope of work, the quality of materials to use, how the work will be done, levels of insurance required and a timeline for completion. This allows for true competitive bidding. To prepare a proper RFB and oversee the bidding, the board must employ the services of an independent consultant or construction manager.

RECOMMENDATION: Litigation is expensive and unpredictable. It is far better to hire a good consultant to prepare proper bid specs than to spend the association’s money in court, levying special assessments for legal fees, and redoing flawed project at the end of the litigation. In addition to proper bid specs, all contracts should be reviewed by legal counsel.

MANAGEMENT COMPANY
FIDELITY BONDS


QUESTION: In last week’s newsletter you said the FHA is now allowing management companies to be on the association’s fidelity bond. Why should they be on the association’s policy? Shouldn’t they carry their own?

ANSWER: Yes, management companies should carry their own fidelity bond but that does not necessarily protect associations. The basic objective of a fidelity bond is to restore an association’s funds should they be stolen through embezzlement or otherwise. The best protection is for each association to carry its own bond rather than rely on the management company’s bond.

Management Company Bonds. The problems with management company bonds are two-fold. First, depending on the policy, the bond may not cover the association at all. It may only cover theft of management company monies by management company employees. Second, a fidelity bond carried by a management company will be in the company’s name. Thus, even if the policy offers theft protection, the association has no insurable interest and cannot directly collect from the insurer. In other words, if an employee of the management company steals from the association, the policy will pay claims to the management company, not the association. The association would have to rely on the management company to reimburse the board for the loss.

Association Bonds. Virtually all HOA fidelity bonds cover theft by board members. That coverage is important but not enough. Boards should make sure coverage is extended to everyone in the association’s money-chain, including HOA employees and the management company. As the named insured, the association can then make a claim directly on the policy if anyone in the chain steals the association’s money. The same cannot be said for management company bonds.

Recommended Amount. Fannie Mae and Freddie Mac require coverage of 100% of an association’s current reserves plus three months of assessments. However, an association’s governing documents may require a greater amount. Boards should check their documents before establishing a bond amount. If their documents are silent, boards should carry coverage in amounts required by Fannie Mae or better.

Loss Control. Rather than trying to recover stolen money, associations would be better served to avoid thefts altogether. To protect against loss, boards should (i) maintain separate bank accounts for operating and reserve accounts, (ii) require the signatures of two directors on any check from the association’s reserve account, (iii) not give authority to the management company to transfer funds from the association’s reserves, (iv) establish internal controls over the association’s assets, (v) personally review financial records, (vi) adopt a conflict of interest policy, and (vii) hire an independent CPA to annually review or audit the association’s financial statement.

RECOMMENDATION: When it comes to fidelity bonds, a policy in the name of the association covering the acts of the manager and the management company is the safest course of action. A management company’s bond may provide some additional protection but boards should not rely on it as their sole remedy. It should only be a backup.

Thank you to Patrick Prendiville, CIRMS of the Prendiville Insurance Agency for his assistance with this question.

-Adrian J. Adams, Esq.

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