Jun 24

QUESTION: Our association has no legal representation and the board relies solely on our management company for legal advice. Is that legal?

ANSWER: Managers are often quite knowledgeable when it comes to the law, which makes them invaluable to associations. Their experience and knowledge gives them the ability to spot problems and sound warnings when boards stray into areas of risk. But, all managers can do is raise red flags. They cannot give legal advice.

Practice of Law Defined. California has an expansive standard for defining the practice of law. It does so to protect citizens from the damage and wrongs committed by unlicensed practitioners. California broadly defines the “practice of law” as dispensing legal advice or service, even if the advice or service does not relate to any matter pending before a court. (Mickel v. Murphy (1957) 147 Cal.App.2d 718, 721.) California’s Office of the Attorney General deems the unlicensed practice of law as a form of fraud and those engaged in it can be criminally prosecuted. Business and Professions Code §6126(a) was amended in 2003 to stiffen the penalties for those who dispense legal advice without a license:

Any person . . . practicing law who is not an active member of the State Bar . . . is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment.

No Insurance Protection. Because the unlicensed practice of law is a crime, insurance will not protect a manager from prosecution for such activity. As provided for in Civil Code §2773, “An agreement to indemnify a person against an act thereafter to be done, is void, if the act be known by such person at the time of doing it to be unlawful.” For example, if you intentionally set your house on fire, don’t expect your insurance company to pay for it. The same applies to dispensing legal advice. If a manager dispenses legal advice and the association is damaged as a result–an insurance company owes no coverage or defense for acts or damage arising out of any illegal act committed by or at the direction of an insured. (20th Century Ins. Co. v. Stewart (1998) 63 Cal.App.4th 1333.)

No Indemnity Protection. The statute cited above also affects management agreements. An indemnity provision in a management contract will not protect a manager from fines and jail time nor will it protect him from lawsuits by third parties or the association when it comes to the unlicensed practice of law.

Unlicensed Practice of Law. Many managers engage in the practice of law without realizing it. Following are examples of what a court would likely deem the unlicensed practice of law:

1.  Advising boards about rights, duties and liabilities. That includes but is not limited to:

  • Proper handling of recall elections,
  • Voting rights and requirements in election disputes,
  • Borrowing from reserves,
  • Emergency assessments,
  • Proper collection procedures,
  • Interpreting the Davis-Stirling Act,
  • ADA compliance issues,
  • Interpretation of contract provisions,
  • Disputed maintenance and repair issues,
  • Disputed water damage and mold issues, and
  • Settlement issues.

2.  Preparing documents that alter rights, duties and liabilities. Managers and management companies can prepare documents that are incidental to the regular course of their business. Anything beyond that must be prepared by legal counsel. That includes but is not limited to:

  • Amendments to CC&Rs, Bylaws, and Articles of Incorporation,
  • Contracts and contract provisions,
  • Collection policies,
  • Election rules,
  • Rules enforcement policies,
  • Settlement agreements, and
  • Hold harmless and indemnity agreements.

Violation of the BJR. The hourly rates for HOA lawyers typically range from $175 to $350 whereas legal advice from a manager is free. In the current economic climate, it’s understandable that boards would try to save money by seeking free legal counsel from their managers. However, doing so exposes directors to significant risk. By statute, directors are protected from personal liability for errors in judgment if they follow the Business Judgment Rule, which requires that decisions by directors be:

  1. In good faith,
  2. In a manner which the director believes to be in the best interests of the corporation, and
  3. With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Corp. Code §7231(c).

Directors will have difficulty convincing a jury that seeking legal advice from a manager was prudent.

RECOMMENDATION: Managers often have enough training to recognize when boards wander into areas of legal peril. When that happens, they should alert directors to the danger and advise them to seek legal counsel. Boards should not put themselves and their managers at risk by pressing their managers for legal advice. It’s not fair to the manager and potentially costly to the association and its directors. When asked for legal advice, a manager should always recommend that the board seek legal counsel. Doing so protects both the manager and the board.

FEEDBACK

Father’s Day #1. Adrian, I just wanted you to know that I loved the comment you made at the end of the newsletter about spending Father’s Day in AZ with your Dad, a former Marine. My mother and father were Marine Corps officers, and I know how important that culture was to me. Semper Fi to you and your Dad! I wish mine was still around, so maybe you could share my well wishes with yours and thank him for his service? All the best, Cat C.

Father’s Day #2. Judging by his age, your Dad probably fought in the Korean war. Glad to hear that he served our country well! Yesterday I did a loan signing for a young man and his family. He served in Iran, got a purple heart. He was hit by a road bomb that did some damage to his spine. I thanked him for serving our country. When I returned to my car, all I could do was cry. I’ll never forget him. -Ellen M.

RESPONSE: Yes, he served during the Korean War. His picture is on the right. He’s a great guy and I love him dearly. Thank you for your kindness toward our veterans. Those in military service are the best and brightest of our country and the ones who sacrifice themselves to preserve our freedoms. They deserve our gratitude.

Adrian J. Adams, Esq.
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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Jun 10

QUESTION: Is there a minimum age for children to use the pool without the supervision of their parents? Can a minimum age be set by the HOA board without a vote by the residents?

ANSWER: Yes, boards can adopt pool rules and set minimum age requirements without a vote of the membership. However, boards cannot adopt rules that would be overly restrictive.

Age Restrictions. If your board bans children from the pool or restricts the hours they can use the pool or sets aside certain hours for adults only, it would be discrimination against families with children.

Supervision. If you adopt a rule that no one under 14 can use the pool without “parental” supervision, it could be deemed too restrictive. The parental requirement excludes adult relatives (siblings, uncles, grandparents, etc.) and adult neighbors from supervising children. A better rule is to require that no one under 14 can use the pool without adult supervision.

Insurance. I talked to insurance broker Rick Russo of the Rick Russo Insurance Agency about risks related to children and swimming pools. He suggested that associations follow the Loss Prevention criteria for pools and spas published by Farmer’s Insurance.

MORE FHA QUESTIONS


Certification #1: Does FHA require our monthly delinquency report or some other monthly status report? -Dave K.

RESPONSE: I talked to Jon Eberhardt, President of Condo Approvals, LLC a company that specializes in FHA certifications for condominium developments, to find out what financial documents must be included in the certification process. He was kind enough to supply information which I’ve added to the website. See “Certification Documents.”

Certification #2. How does FHA approval help an association? It seems like it only helps buyers who may not have the income to pay their dues. This is a burden on our association trying to recover the costs from the high number of foreclosed properties. -Robert S.

RESPONSE: Five years ago, FHA insured loans accounted for only 3% of the market. Now they account for more than 50% of all new home loans and 80% of first time home buyers. Previously FHA buyers could purchase with credit scores in the 500s. The median credit score for an FHA buyer today is in excess of 700. Moreover, loan limits now go to $729,750. As a result, FHA insured loans are significant to sales in most condominium associations.

In addition, they are increasingly used in refinancing and reverse mortgages. That makes FHA insured loans hard to ignore. For some associations, FHA certification is unnecessary. For others, it may be vital to rebuilding sales and property values in their developments.

RECOMMENDATION: Boards are allowed to make business decisions about whether the benefits of FHA certification outweigh the risks and costs. They should discuss the matter with legal counsel before signing documents.

THREE BIDS

QUESTION: Is the board required to get three bids before approving major repairs? I think we should before we vote but our president has not been doing that.

ANSWER: There is no statute that requires three bids. Even so, depending on the size and nature of the project, industry standards require at least three bids before the board approves a major expenditure. It is part of a board’s due diligence.

Sleeping Board. From what you described, it sounds like your board is asleep at the wheel. The president is only one director. When appropriate, fellow directors can demand additional bids before approving projects. If the president refuses, he can be removed from office. It’s not the president’s fault if you let him dictate policy. You guys need to step up to the plate.

TEMECULA WINERY

On June 28, Equity Management will be holding its Summer Symposium at the Wilson Creek Winery in Temecula. Larry Stirling, author of the Davis-Stirling Act, and Adrian Adams will discuss the re-write of the Davis-Stirling Act as well as current trends in the industry. They will be joined by HCS Collection Services to address collection solutions for associations.

For more information or to register for this event, contact rsupalla@equitymgt.com or call (951) 296-5640.

ASSEMBLY BILL 2273

Due in large part to your prior letters, AB 2273 has successfully made it through the Assembly and is now in front of the Senate Judiciary Committee.

This is the bill that requires lenders to record foreclosure sales within 30 days of the foreclosure. It creates accountability by timely making lenders responsible for HOA dues on properties they acquire. As expected, lenders are strenuously opposing the bill.

The bill is being analyzed this week by attorneys in the Judiciary Committee and we need as many letters of support as possible. Please copy the suggested letter and make sure you add your home address to the letter. Then fax it to (916) 772-3781 or email it to caiclac@aol.com. Letters will then be delivered to the Committee.

FEEDBACK

Unauthorized Newsletters. Member newsletters naturally use the association’s name by including it in the text to refer to the association. In your article, you presumably meant something more restrictive, such as “use the name of the association in such a way as to imply that the association sponsors or endorses the organ.” To avoid inciting association boards into attempts at overbroad censorship of such private organs, it would be good to make “using” more precise in this article. -Jonathan P.

RESPONSE: Using the association’s name in the text of member-sponsored newsletters is not the problem. It’s when members use the association’s name and logo in such a way as to give the impression that their letter/newsletter/website is an official communication of the association that problems arise.

Recall Expenses. Boards could assess a special assessment for all owners for the costs of the recall resulting in peer pressure on the ones who started the process. -David A.

Stray Cats. I continue to receive passionate emails about animal shelters that execute animals, the benefits of neuter and release programs, and cats murdering song birds. it’s clear from that the debate cannot be resolved without first tasering everyone and putting them on Prosac. As a result, I will forgo printing any more feedback on this subject until the dust settles. -Adrian

NO NEWSLETTER. Sorry, no newsletter next week. I will be spending Father’s Day with my Dad in Arizona. He is a former Marine who is now in his 80s. He’s a great guy. Semper Fi Dad!

Adrian J. Adams, Esq.


“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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Jun 03

QUESTION: A recall petition was just defeated by the membership. The current board now wants to charge everyone who signed the petition for the cost of the recall. Is that legal?

ANSWER: I could find nothing that would allow a board to bill petitioners for the cost of a failed recall. I understand the desire to recoup costs–if the recall failed, why should the association bear the expense? However, if petitioners can be billed for the cost of a failed recall, does that mean directors can be billed when the recall is successful? It doesn’t work that way.

Cost of Doing Business. The association bears the cost regardless of the outcome. For example, the State of California incurred huge expenses in the 2003 recall of Governor Gray Davis. The election cost taxpayers $67 million. If the recall had failed, the State could not have billed the people who signed the petition. Such expenses are part of the cost of democracy. For HOAs, it’s part of the cost of doing business.

Vexations Owners. However, when it comes to vexatious owners who file petition after petition to force endless recalls, it would be nice if there were a way to bill them for their wasteful and disruptive behavior. Part of the problem is that the Corporations Code sets the bar too low for petitions. Only 5% of the membership can trigger a recall meeting. That means in a 100-unit association, 5 people can force a costly election. It would be helpful if the legislature amended the Davis-Stirling Act to raise that requirement to 20%. That would eliminate a lot of frivolous petitions.

FHA CERTIFICATION
PENALTIES

QUESTION: We received notice that our FHA certification expired. It came from a company offering to help us get recertified for a fee. Is there a cost effective way to get our association recertified?

ANSWER: You can minimize expenses by doing the certification yourself. Unfortunately, FHA certification can be daunting. That is why there is now a small cottage industry of companies that specialize in helping condo developments through the certification process. Whichever route you choose, you should be aware of the burdensome requirements imposed by the FHA.

Certification Requirements. FHA documents require an authorized association representative to certify that:

1. They reviewed the project and it meets all state and local condominium laws and all FHA condominium approval requirements.

2. They have no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent (including but not limited to: defects in construction; substantial disputes or dissatisfaction among unit owners about the operation of the project or the owners association; and disputes concerning unit owners, rights, privileges, and obligations).

These overbroad requirements create huge openings for the FHA to come after the signer of the certification if any FHA insured loans become delinquent. The above is scary enough but then the FHA tacks on the following:

3. The submitter understands and agrees that the submitter is under a continuing obligation to inform HUD if any material information compiled for the review and acceptance of this project is no longer true and correct.

Does that mean every time an owner is unhappy and threatens to sue the association, the board must immediately file an amended application with the FHA? I think it does. That means failure to timely notify the FHA could result in penalties against the signer of the certification. The penalties are significant.

Penalties. The FHA has the power to impose fines up to $1,000,000 plus prison time if the certification documents contain “any false, fictitious, or fraudulent statement or entry.” That poses enormous exposure to directors who sign FHA documents if any of the three provisions are violated.

RECOMMENDATION. The onerous certification requirements and heavy handed penalties have created roadblocks to the housing industry’s recovery. CAI National has been meeting with HUD/FHA officials for months trying to talk sense into them. According to some news reports, FHA is going to modify the personal liability language in the near future. If it were me, I would not sign the current FHA certifications. It creates too much exposure. I would wait for a loosening of the FHA requirements. But that is something for boards to work out with their legal counsel.

FEEDBACK

Avoid HOAs. I bought a condo-conversion back in 2004. I was President for six years and relied heavily on your website. I short-sold my unit in 2010. Condo life is definitely not for me but I still receive your newsletter. It reminds me weekly to avoid HOA living. So, as you can see, your newsletter-website serves multiple functions! Good job. -Kevin H.

RESPONSE: My pleasure.

Stray Cats #1. Thank you to BME for her comments regarding shelters. Local pounds are not shelters. They house dogs and cats for a very brief time before being put to sleep–it’s heart wrenching. I recommend contacting local groups, i.e. Heaven on Earth, Society for Animals, Pet Orphans, Kitten Rescue, etc. for assistance. You can also contact the folks at Petco, Pet Smart, Centinela Feed & Pet and Red Barn. Their staff have contact numbers for local rescue groups. If HOAs have a way to trap, then spay/neuter with Fix Nation that is wonderful and will help keep the stray pet population in check. -Ellen M.

Stray Cats #2. Thank you for your informative and entertaining newsletters. I would like to respond to “BME” that neutered cats stop making kittens but they still murder birds. They should never be turned loose even after being spayed and neutered. They should be taken to animal protective associations in your community. All cats should be kept indoors at all times. Many song birds are nearing extinction because of loose cats. Let them go after the mice inside your home but don’t let them loose to annihilate our bird populations! -Al P.

RESPONSE: Uh-oh, fur and feathers are flying.

Stray Cats #3. “BME” talked about fixing stray cats and releasing them back into their previous environment. The problem isn’t only that they multiply, (i) they leave their feces and urine everywhere to mark their territory; (ii) they warm themselves on cars and their claws scratch the paint; (iii) people leave food out for them that attracts rodents; and (iv) some people are allergic to them. -Marie S.

RESPONSE: I thought that only applied to lawyers.

Perspective. I have to tell you how much I enjoy your newsletter; also how invaluable the Davis-Stirling website is! Aside from everything else, I always find people who have more/stranger problems than we do at our association. It’s a good feeling–puts things in perspective. -Nancy H.

-Adrian J. Adams, Esq


“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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