California Condo & HOA Law

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October 14, 2005

Board Members As Friends - Does it Work?

A reader wrote this to me: "Dear Beth:I am a member of the board in a condo building in ... (City name left out). The board is made up of 5 members. 3 of the members are close friends and make their own discussions at times without consulting the other 2 members. Cannot this be considered collusion on their part. They seem to make their own rules. What is the correct way to handle this problem."

Perhaps the board members are unaware of the open meetings laws for HOAs found at Civil Code Section 1363.05, not understanding that the definition of an association [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." These laws are intended to protect the owners from clandestine board meetings but they also protect the board members left outside the loop. Take a copy of the statute to the next board meeting. It can be pulled from the California State Government Website at www.ca.gov (navigate your way to find the laws of California, Civil Code Section 1363.05).

This does not resolve the issue of board members voting in blocks or as friends but it will (hopefully) keep board members who like to discuss business outside a meeting and/or in secret honest by reserving business discussions for meetings. Violating the law is also a breach of fiducuary duty.

To combat the voting blocks, try getting the board makeup to change by supporting independent or new candidates at elections of the Association. Do be aware however that there are new limitations on HOA spending for elections in SB 61.

Posted by Beth Grimm at 9:29 PM

Inspectors of Election - Will They Be Able To Do Their Jobs?

Beginning July 1, 2006, elections in Associations will be more structured, and more complicated (see prior blog). Associations will be required to appoint 1 or 3 independent Inspector(s) of Election to oversee the elections. Independent means someone who is not affected by the election or compensated for services by the Association. The statute suggests as possibilities: "... , a volunteer poll worker with the county registrar of voters, a licensee of the California Board of Accountancy, or a notary public." None of these persons is likely to be trained in legal principles of HOA elections. This could be a problem given the confusion created by the new elections statute embodied in SB 61 (discussed in prior blog). The Inspector(s) are charged with the following tasks:
--"Determine the number of memberships entitled to vote and the voting power of each.
--Determine the authenticity, validity, and effect of proxies, if any.
--Receive ballots.
--Hear and determine all challenges and questions in any way arising out of or in connection with the right to vote.
--Count and tabulate all votes.
--Determine when the polls shall close.
--Determine the result of the election.
--Perform any acts as may be proper to conduct the election with fairness to all members in accordance with this section and all applicable rules of the association regarding the conduct of the election that are not in conflict with this section."

In order to do so, the Inspector would have to have access to and understand the association's bylaws and any other governing documents that have provisions related to voting and elections. And in areas where the new statute conflicts with the governing documents and Corporations Code (such as the practical effect on cumulative voting and use of proxies discussed in earlier blog), the Inspector would have to make rulings that have legal effect. If the governing documents have "good standing" requirements limiting the right to vote for some, the Inspector would need to determine who is entitled to vote. Signatures will have to be verified. It's a job fraught with potential legal liability. There are ways to minimize the possible problems, with foresight, by having the Association's legal counsel provide opinions before the election on various scenarios like those described in the prior blog. Of course, if any Owner brings their own attorney to the meeting, another opinion or opinions may be injected.

Maybe the legislators will see the problems and fix the legislation to clarify what happens when a conflict such as that described occurs. Maybe not. What is likely to happen is that a new cottage industry of "Election Inspectors" will probably be generated by the bill, because more than 30,000 elections will take place every year that require the involvement of an Inspector or Inspectors of Election after July 1, 2006.

Posted by Beth Grimm at 8:52 PM

October 9, 2005

A Recipe for Disaster? What Will Happen to HOA Elections in California?

Leaving legislation to legislators - sounds reasonable, but it can be a problem sometimes. Legislators often do not have to survive in the real worlds that they create. I have served on a legislative action committee in California for more than 15 years that monitors and proposes legislation, but the last 5 years have been about defensive measures rather than proactive work - involving educating (or trying to) Legislators in California about real world practical issues that come up when the lawmakers try to micromanage from the halls of Sacramento. The group I serve with finds itself continually battling legislators over poorly drafted legislation, proposing cleanup legislation following each legislative session, providing educational information and provocative questions to legislators every single legislative session to help them understand the negative ramifications of bills that ignore practical everyday application problems. And as for those bills that are workable, touted to be "pro-consumer legislation" - the costs to consumers in this state are dear. If you live in a homeowners association, I do not have to tell you this. The costs are ever rising with new legislative requirements added every year. The law governing homeowner associations has become so complicated that every Board needs professional help to get through the annual disclosure requirements unscathed, and now I could say the same about elections. The latest? SB 61. If you want to see this bill, go to the California State web site, Senate area, at http:://www.sen.ca.gov. Click on legislation, put in the bill number, and click on the bill that deals with common interest developments. At first glance, this bill appears simply to provide a laundry list of elections requirements. It proposes a means of dealing with proxies and a means for secret ballot elections via a double-envelope secret balloting system. One can read the statute and completely miss the true impact. What appears to have happened that with this bill is that the legislator who proposed it, and each and every legislator in California who approved it (which is most of them), and the Governor who signed it, could not perceive the various practical problems it presents for homeowner associations in this state, in spite of many communications from the legislative group I work with, and others who understand how HOAs operate.

The bill attempts to combine the secret balloting system for public elections that involves a polling place, an unsigned or absentee ballot, independent accounting of ballots, and an election announcement in a public forum with a corporate election process calling for an annual meeting, proxies, voting at a meeting by members present in person or by proxy, quorum requirement for a valid meeting, cumulative voting, nominations from the floor, counting of ballots at a meeting, and announcement at the meeting. Sounds good -- but mixing up the two raises some difficult hurdles. SB 61 requires that proxies that are prepared must contain a separate page for the proxy giver to indicate to the proxy holder instructions on how to vote at the meeting at which the proxy would be used. By the way, a proxy is a legal document that allows one person to go to a meeting and exercise a member's vote because that other person is not able to attend. Use of proxies is a way to give homeowners in a homeowner association a “presence” at a meeting and help establish a legal “quorum” which is the minimum number of owners that must be "rep-”presented” in person or by proxy for the meeting to be a legally valid meeting.

A double envelope voting system involves sending out two envelopes and ballot, and requires a member voting by this method to place an unsigned ballot in one of the envelopes with a control numbering or other system -- and placing that envelope inside the second envelope which is addressed to an inspector of election or dropped in a ballot box. This allows an owner to vote secretly. The ballot box could be in an inspector's office, in the office of the association, and/or brought to a meeting.

Sounds simple enough. But trying to use both methods in the same election can be quite confusing. For certain subjects, the double envelope voting system is required. If the Board sends out the ballot and two envelopes and the proxy with the page attached that allows the member to note how he or she wants a proxy holder to vote, the Board will of course have to explain the two different methods of voting. If it proceeds without sending a proxy along with the ballot and envelopes to avoid confusion, it could backfire. Any association member that wants to exercise the right to cumulative voting, and/or brings a bunch of legally valid proxies to a meeting to be counted (assuming the governing documents allow for cumulative voting and allow proxies) has legal standing to ask that the proxies be validated. This raises a dilemma. If an owner sent in a ballot and then gave a proxy to someone to vote it, a potential legal issue arises as to whether the proxy can be used. Under California law, a person can revoke a proxy by appearing at a meeting, but can they revoke the ballot that was sent to the Inspector? Under current corporate law, a written mailed ballot cannot be revoked. However, what if the member is holding many proxies and wants to cumulate their votes? Unless the cumulative voting process is explained in the package of voting materials, (which would be appropriate only in an instance where the governing documents for the Association provided for it), then those who have already voted for candidates on the ballot by sending in the unsigned ballot have no way to go back and cumulate their votes. (This would normally resolve itself if the member gave a proxy because the proxyholder could have the opportunity to cumulate votes at the meeting after it was announced.)

This is a big deal. SB 61 requires secret ballots in any election in an HOA for board members, special assessments, amendments to the governing documents, or transfer of common area. This encompasses most of the elections in an HOA. The secret voting process requires the mail ballot double envelope balloting system which is the type used for absentee balloting and voting at polls in a public election.

And try to picture a recall election which can involve two elections on the same night - one to see if a board or board member is recalled, and the other to elect successor(s) if a board or board member is recalled. These are already complicated enough but the proxy system at least allows the attendee put in charge of voting to vote at both elections (if there are in fact two). The double envelope system would not work in a recall election, as it would leave any Association whose board was voted out of office without a viable way to proceed to the next election - unless the Inspector(s) of Election were appointed to conduct the second election as well.

The system proposed by SB 61 does not appropriately address cumulative voting and for all intents and purposes it complicates the use of proxies .... Thoughtful practitioners have for years explained to Boards why they do not want to try and combine a written ballot and voting at a meeting using proxies, and the confusion that would result. Now, it looks like it may be what is required, rather than what is to be avoided.

The real question is when and where will this be sorted out – at a meeting? or in the courts? And who will decide – an Inspector of Election? Or a Judge? I don't think any of the proponents thought this far ahead, but arguments about the practical problems encompassed in the processes legislated went unheeded the entire legislative session. Once this bill kicks in as law (after July 1, 2006) all a dissatisfied owner must do to challenge an election is file court petition for immediate relief. An owner who does not seek legal counsel and tries this process on their own will only complicate the court proceedings and draw things out to the point where an Association will have to pay considerable attorneys fees, and although the owner can recover legal fees if they prevail (if they use an attorney), the Association cannot recover legal fees unless the court finds the action to be frivolous. I believe this is a finding that will be the exception, rather than the norm, having (in my court days) experienced that judges often bend over backwards to help a pro per party (one that is representing himself or herself).

And what about costs. Costs for a complicated mailing, costs for an Inspector or Inspectors of election, costs for a redo when something in the process gets challenged.

It's an important issue - stay tuned.

Posted by Beth Grimm at 8:48 PM

October 4, 2005

BOARD MEETINGS - WHO SETS THE BOUNDS OF CONDUCT?

It's happened again. The people who write the LA Times "Condo Q and A Column" have presented quite a biased (and in my opinion, and that of other legal practitioners in this state, inappropriate) view of what Owners can do at homeowner association board meetings by claiming that Owners should turn on their tape recorders!

These are not public meetings! The Brown Act does not apply. The Davis Stirling Act sets the boundaries of what homeowners can do at these meetings and it specifies that owners shall have the opportunity to address the board, but the Board may set reasonable rules regulating the homeowner forum process. (Civil Code Section 1363.05 - see below.) It does not say that homeowners have the right to tape meetings or that boards must allow taping. And secretly taping people without their knowledge in a homeowners association meeting is against the law.

Now the Board, on the other hand, has the authority to plan the meetings, choose the time, place and Agenda, and set meeting decorum. If the Board sees value in taping the meeting - it can do so, assuming it will announce that it is taping the meeting at the beginning of it. However, allowing the taping of meetings creates all kinds of potential problems (as discussed in an earlier blog) and I do not recommend it, except in rare cases where a board needs to find a method of preventing childish and disruptive outbreaks at its meetings - sometimes video-taping has that effect.

And taping is not the only matter the Board can control.

In any uncomfortable situation where the Board might not know how to react, having a policy in place (like a road map) is important. I think many Boards need help at board meetings. Board meetings are supposed to be a time when the board can conduct business, without disruption from the attending owners. The "homeowner forum" is supposed to be a time when Owners can bring their complaints to the Board members face-to-face," but it was not intended to be a time when the members can corral the discussions on the business before the Board and disrupt the Board's decision-making process.

Since January of 1999 many associations have become aware that they must provide for a “homeowner forum” time at any meeting, to allow the homeowners to address the board. In theory, the idea was that the homeowners would have a chance to speak to the board directly about their concerns. In practice, however, abusive tactics have been the experience of many boards. The statute, Civil Code Section 1363.05(i), says that boards of directors must allow homeowners to speak at meetings, but are entitled to set reasonable limitations on time. This word “time” can mean at a particular time during the meeting (before, during, or at the end of), and/or can relate particularly to the amount of time a person is given to address the board. The practice in many associations is to set aside 1/2-1 hour of time at the beginning or end of the meeting, and allow the homeowners who wish to address the board an opportunity, usually giving them somewhere around 5 minutes each (sometimes more). The time given to homeowners to speak should be consistent, meaning that it would seem unfair to one homeowner if they were only allowed to speak 3 minutes and someone else is allowed to speak for 10 minutes. I have seen situations, especially at annual meetings, where homeowners sign up to speak and then want to “give their time” to another homeowner so that that person will have more time to speak. I am not in favor of that practice, but if a board wanted to allow it, its the board's choice. These limitations are purely dependent on what the Board thinks is best for the community (and for it - to be able to get through the business before midnight!).

In order to get any control over meetings, a meetings policy followed consistently can be a great help. If this policy is handed out at all association meetings people will become used to it and, hopefully, comply. Before the policy is approved by the Board, it needs to be circulated to all of the homeowners so that they will have the opportunity to comment on it.

"No taping of meetings is allowed" should be on the list of inappropruiate conduct. The reasons could be given in support of it such as: "We believe taping of meetings creates problems such as discouraging members to speak during the forum time, misuse or possible manipulation of the tapes, confusion as to what constitutes the official record of the meeting, and hard feelings."

The Board could, in addition to the policy handout, at the beginning of every meeting, announce the existence and purpose of the policy. The truth is that people have a much harder time arguing with a piece of paper than a real live authority person.

In order to adopt a meeting policy, a Board will need authority in the governing documents to set rules and regulations. Most Bylaws have it in some form. If the Board wants to consider disciplinary action for failure to honor the policy, which might include suspension of membership rights, fines, monetary penalties, or charges for attorney’s fees (if necessary), the authority would have to come from the association documents or the law, either generally or specifically. Associations definitely need the advice of a knowledgeable attorney to determine the extent of authority to discipline an owner.

Are your meetings a disaster? If so, think about a meetings policy. And also, as a parting thought, be careful where you get your information - see my earlier blog about considering the source. In my humble opinion, the LA Times used to have a much more trusted and balanced authority figure answering questions of the readers in Jan Hickenbottom (author of "Questions and Answers" - found on Amazon.com). Since she was replaced, I have great difficulty reading the column.

Posted by Beth Grimm at 12:52 PM

EARTHQUAKE INSURANCE - TO BUY OR NOT TO BUY - THAT IS THE QUESTION!

Many community associations have been inquiring whether they should buy earthquake insurance, considering that the costs have become exorbitant. After networking with attorneys all over the state of California that had to deal with the problems involving reconstruction, collection of special assessments, and disputes with insurance companies in the aftermath of the Loma Prieta and Northridge quakes, it is my opinion that associations should purchase earthquake insurance if they can get it, even if the price is high. The reason: Associations that DID NOT have coverage experienced severely exacerbated problems. Translated into English - the Associations that did not have coverage had a much harder time recovering. Many still have not recovered - and it is years later. The homeowners who wish to rebuild and keep their homes are the biggest losers when there is no insurance and the special assessment to rebuild is out of reach of the average person.

I have been asked since to speak to many associations about the considerations behind the decision to buy or not to buy - and have shared the floor with insurance representatives that are able to find earthquake insurance, some even with a 10 percent deductible, a "per building" deductible (which is more desirable than a "per development" deductible) for a sum of money that is sufficiently affordable. By the way, my rule of thumb in 1996-2001 was that I considered an affordable master policy to be somewhere in the range of $400.00 - $600.00 per year per unit for homes priced in the neighborhood of $200,000.00. With rising insurance costs since then, I would consider protection in a consideralbly higher range per home to be affordable and worthwhile.

Many boards, when they face the increases coming through for earthquake insurance and the cuts in coverage, immediately react with negativity, and their objectivity is lost, because it just seems unfair. Maybe it is unfair - life is not always fair. But it is extremely important to consider the risks involved in saying "NO".

Those risks are:

·If there is an earthquake, the board members and association could be sued and the directors and officers liability carrier may deny coverage for "failure to adequately insure".

This "failure" is an excluded item on most directors and officers liability coverage policies. Even though there does not seem to be a binding precedent yet - many of the insurance companies are publicly claiming that they could assert this exclusion as a basis to deny a claim if an association or board was sued for failure to purchase earthquake insurance.

·If the association has no coverage, and there is an earthquake, only those owners with substantial equity in their property will be inclined to stay and weather the special assessments needed to reconstruct.

In many cases, we could easily be talking about the difference in a $7,000.00-$15,000.00 assessment in an association that has master earthquake coverage as opposed to a $100,000.00-$150,000.00 assessment in an association that does not (based on discussion about homes that average $250,000.00 to $450,000.00 in cost, perhaps a scarcity today).

·"Stand alone" coverage which is purportedly being offered for individual homeowners whose associations are uninsured is not a very practical solution, considering how difficult it would be to rebuild one single unit in a four, five or six unit building. (Besides, reportedly, the quotes given to owners are astronomical, and some policies sold purportedly as “stand-alone” products will only pay if there is underlying coverage.)

If your CC&Rs require that the board purchase earthquake insurance coverage, then it is my opinion that it must be purchased unless the CC&Rs are amended. If it is not, then there is a problem by virtue of ignoring the governing documents and they should be amended.

For any association that is having difficulty getting earthquake insurance or that is having difficulty justifying the cost and is considering just saying "NO", the following [minimal] steps should be taken in order to enable the board to claim the decision was a "prudent business decision" and protect the Association.

The board of directors should investigate as follows:

·Obtain risk analysis for type of development and geological location.
·Procure multiple bids from insurance companies for earthquake insurance, or from insurance broker who has access to several different companies.
·Survey homeowners to see where they stand on the issue (providing them with meaningful facts and information the board has gathered).
·Determine whether the costs involved would require homeowner approval (if they are in excess of legal limits for increases in regular assessments or imposing a special assessment).
·Make a prudent decision after gathering and considering the information as described above.

If the association wants to purchase earthquake insurance and the costs exceed legal limits for increases, then the association must go to the membership to get approval of a majority of a quorum of the homeowners for the special assessment or the increase in regular assessments to cover the insurance costs under Civil Code Section 1366 (the governing documents may require majority approval for the purchase – be sure to get legal advice on this). For those associations waiting for a state program to bail you out, you can stop waiting. The California Earthquake Authority, and any other state program selling residential insurance policies, will not provide coverage for associations because associations must purchase commercial insurance. Community associations are considered a business by the insurance world. Owners can purchase coverage there on an individual basis, but there are no master association policies available.

Some associations are considering using the money that would otherwise be used to purchase earthquake insurance for retrofitting. If your buildings could benefit greatly from retrofitting, this might be an option. However, the above considerations still apply. Perhaps if an association must pay exorbitant amounts for layers of insurance to get full protection, there might be a feasible way to combine the purchase of minimal coverage with additional monies being spent on retrofitting.

It is best to consult with your (knowledgeable, I hope) legal counsel and seriously discuss the legal ramifications, and consult with a knowledgeable insurance agent to discuss the options available, before turning your back on the question involving the purchase of earthquake insurance.

Posted by Beth Grimm at 12:48 PM