California Condo & HOA Law

July 3, 2008

Charging Assessments With No Backup - Can the HO Withhold Payment?

I have written several blogs about what an HOA can do if a homeowner does not pay assessments on time. It's brutal. Most documents and the law allow HOAs with the document authority to resort to nonjudicial foreclosure if homeowners don't pay. And if that does not work the HOA in most cases can pursue a personal debt action against the owner. This blog is not to argue the merits of that, but rather to answer a question/comment that was written about one of those blogs. The gist of the blog was that HOAs have to work to diligently collect assessments as a matter of their fiducuary duty, or the innocent who do pay their assessments suffer since they have to pick up the slack. But this commenter has a point. Read on.

"Does this situation apply to Special Assesment. We have had three Special Assesment in the last 5 years and not once will they give us an accounting of the funds and the work completed. I have been holding back my last special Assessment because it was over $3500.00 and I still have not accounting of what was done with prior monies..Management has elections, but they keep holding on to their seats, since they are the ones who make the decision on who can serve on the board after the election."

Aside from the comment about management having elections (because while many feel that management has too much control - I do not know of any association that elects management or management that chooses who serves on the board), I feel this reader's pain.

Owners should get information on the backup for assessments. What happens when an owner asks for backup information for the assessment and does not get it? Does it matter whether it is an increase in the regular assessments, a special assessment, or an emergency assessment? Does the board have to give it?

I would say yes. Now, how do you get it if the Board refuses to give it? Here are some options:

1. Sue the B _ _ _ _ _ _ _s! (You did not hear it from me though.) Of course, I abhor this remedy. And I would never suggest suing except as a last resort, but if it were to come to fruition, the owner would be asking for a court order to provide the information, and would probably get it, and would probably be able to recover attorney fees, if, that is, the request was legitimate (meaning that the owner did not simply ignore the information that was sent out by the Association or fail to keep the mailing address current to receive Association communications).

2. Make a written demand for information. Written demands tend to engender more accountability than phone calls or gripes behind the Board's back.

3. Run for the Board. If elected, you would have access to all of the HOA information. If you can get like thinking folks elected too, perhaps the HOA management would improve.

So - a little more information.

A Board cannot increase the regular assessments legally if it has not provided the required budget and reserve study information to the members for the prior year, unless the members approve the increase.

A Board cannot impose an emergency assessment without notifying the members of it, and of the grounds for it, and certain grounds (reasons) require certain findings. For example, covering a safety issue may not require findings, but it does need to be explained to owners, but imposing for a repair that came up, needs to be done, and which was not apparent at the time the budget was completed requires findings about the urgency, the need and the reason the Board did not know about it before.

For special assessments that exceed 5% of the budgeted gross expenses, the special assessment requires owner approval and it is hard to understand how owners would approve something if they did not know what it was for. (Pretty dumb if they do.)

Still, I can understand how it happens that an owner might get a notice of a special assessment or special assessments, and does not have any backup. Some boards, still operating pre the 2006 HOA election rules changes, call meetings, get the owners present to approve an assessment, and fail to notify any of the other owners in the development about what went on at the meeting, and fail to give them a chance to vote yes or no.

Good, or bad? If the Board does not provide information to those who do not attend the meeting, or put the information in writing and make it available in that form, I would say there could be a problem. They may have their own (protective or otherwise) reasons for not putting anything in writing. But it is not right. The whole community needs to be given the information and chance to vote.

Owners are entitled to know what they are paying for. Failure to inform does not absolve the board of anything. While it is true that owners are not entitled to withhold assessments, and that they can end up in a quagmire of added costs and threats if they do not pay, they are not prevented from taking action to get them back if the Board acts improperly. California offers a small claims remedy of up to $7500 if an owner brings in a good case. The owner would have to show that the Board actually did something wrong to get a judgment for a special assessment (but would have to pay it first in order to even establish a claim for damages), "Wrong" might encompass any of these:

1. The Board did not follow the California election laws and send out a double envelope secret ballot for voting.

2. The Board did not seek owner approval at all when it was required.

3. The Board did not send out the budget and reserve study information and did not get owner approval.

4. The Board did not make any findings justifying an emergemcy assessment.

****

And even then, in the Board can usually go back, do things right, and get the money that way. If there is a need for the money, the Board needs to do it right.

Working with a tightlipped or uninformed board is frustrating, that is for sure. Owning a unit in an association that seems to be poorly run, hit with assessment after assessment, can also be very frustrating. The less educated or informed the board is, the more "closed" they tend to be, so sometimes it takes drastic action to get the board to be accountable.

Sometimes it requires a new board, and sometimes it requires a lawsuit (small claims or superior court). Often, simply getting other owners involved to work for board turnover can work. Getting involved and doing something is the key to results. But withholding assessments is a risk - as it just ups the ante of risk and problems for the homeowner.

Posted by Beth Grimm at 8:13 PM

May 4, 2005

Debunking Some Myths About Collections

Is it fair to foreclose on property in HOAs for nonpayment of collections? It sounds like a horrible remedy to collect a few dollars in delinquencies. The press all over the state has a heyday everytime there is a story about a foreclosure for a small assessment amount. It does not happen every day, and not really very often in the scheme of all things in HOA land. There was a big hullabaloo over a story in Sea Ranch, California more than 5 years ago, and then another big hullabaloo more recently over a story in Copperopolis, California. That's two cases involving annual assessments of under $200. Considering there are more than 35,000 HOAs in this state, well, .... you do the math. Scheduling a foreclosure sale on a CID property is not taken lightly by anyone. An association's preferred resolution is collecting the owner's fair share of assessments, to be sure. But that is not always possible. In both the Sea Ranch case and the Copperopolis case the owners ultimately had to admit they had been told foreclosure was a remedy that could be used - they apparently did not believe it and resisted until late in the processes which resulted in attachment of considerable costs of collection to a small original debt. Neither owner thought they should have to pay these costs. Depending on where you are sitting, you may have differing opinions on this. However, what is true is that if an Owner does not pay assessments in a CID the other owners will be adversely affected by that.

This second and latest story (Radcliff is the name of the owners - have you heard about it?) has lead to the proposal of legislation that would curtail foreclosure as a remedy for all (although advertised as “small”) association owner debts. Legislators are jumping on the bandwagon to condemn those who take steps to exercise the foreclosure remedy to collect assessments. The truth is that the threat of foreclosure is more valuable as a basis for incentive to pay HOA assessments than use of the remedy itself. Without it, Associations could end up on the bottom of the list to be paid by homeowners, and that list is considerable in today's world of credit card living.

But let's examine a recent story in The Press Enterprise, an Inland Southern California newspaper, a typical HOA banger type of story feeding off the Radcliff craze. Dissected, maybe things look different. See clips (clips in quotes) and my comments (in italics) below:

"When Teddy Sheldon got a bill from her homeowners association demanding back payment for what she contends are unauthorized assessments by an unelected, self-appointed board, she resisted."

Right off the bat, it is clear the owner decided to make the rules rather than giving credence to recorded property restrictions .

"It was just a clique that got together and began collecting dues," said Sheldon, who lives in the unincorporated community of Pedley north of Riverside. "I didn't recognize them as legitimate."

Again, the question arises as to what qualifies this owner to make this determination on whether the assessment was legitimate.

"Seven years later, she has filed two small-claims court cases and a lawsuit, paid more than $2,000 under protest to stave off threatened foreclosure and has gone through three attorneys. All over what began as a dispute over a $7 monthly assessment."

One has to wonder what "gone through" three attorneys means. In could mean that the owner was difficult and at least two attorneys eventually opted out, which tends to happen when a client demands to assert a losing case. And there is no indication this owner prevailed in the two small claims matters. Surely had she won, this reporter would have been more than anxious to say so - it would have bolstered an argument that the position the owner took was correct.

"Critics of the power wielded by homeowner associations say cases like Sheldon's -- where minor disputes lead to costly and emotionally exhausting litigation -- highlight all that is wrong with common-interest developments and the elected boards that oversee them."

It takes "two to tango" as they say and this is true in protracted litigation. An owner can protract litigation as easily as an association. An attorney for either party that wants a viable client (without regard to whether the case is good or not) can protract litigation. The Courts are notorious for delays resulting in increased costs and drawn out cases. Litigation is costly by nature. It sounds from this article that the owner initiated court actions that were not successful. Had any one of them been successful, then the successive actions should not have been necessary.

"I think a lot of the homeowner associations have lost sight of American freedoms," said former Assemblyman John Longville, a San Bernardino Democrat. "(They) think they can decide for you what you can think and see. They are extraordinarily paternalistic."

If Mr. Longville ever served on an Association board and had to deal with the difficult issues, the delicate balancing acts, and the rising costs for HOAs that Boards face every day, he might tender his comments with some understanding of the difficult role of a Board of Directors. It is true that Homeowner Association Boards do wield a considerable amount of power via governing documents. However, along with that power comes a world of responsibility. Reporters seldom speak of the fact that HOAs have been given a huge burden of supporting a good portion of the state's infrastructure and the obligation to collect sufficient funds to pay for it. HOA Boards have been given a huge burden of running these associations and budgeting and accounting for millions of dollars. They are in fact charged with many of the tasks and responsibilities of local city and county government officials, and in fact their job is even harder because they are usually charged with responsibility for preserving and sometimes even enhancing property values in the development. They are charged with the responsibility of refereeing disputes between owners, and keeping the peace. But do you know else what is different between municipal officials and Board Members? HOA Board Members are unpaid volunteers. They don't get compensated; they don't get sick or stress leave; and they don't get vacation pay. They do not share the statutory immunity from lawsuits that municipal officials have for their behavior and official acts. They do not have the ability to schedule a tax sale for nonpayment of assessments. [So some people do not take the assessment obligation seriously.] And there is no selection process through interviews where qualifications, education or experience can be considered. HOA Members are not as a rule standing in line to run for the Board. Most HOA dwellers to not want to be bothered with such things. Many Boards have to draw people out to serve, begging and pleading. There is little competition for elections in most associations. The positions are not generally coveted. What drives people to serve can be self-centered and self-serving. However, many owners step up because it is a job that has to be done and they have property to protect.

“Sheldon said she stopped paying her monthly assessments after learning her association had a bank balance of just $4. Assessments used to care for a 0.63-acre park were not being collected, Sheldon said.”

Wouldn’t the better approach for someone making such a startling revelation be to volunteer to serve on the board with a goal toward more assertive collection efforts so that the Association could fulfill its responsibilities? In taking this owner's approach, one adds to the problem rather than contributing to the solution. Failure to maintain the park because of a shortage of funds can lead to all sorts of other problems, some quite serious, in ways that put all of the owners and properties at risk.

“The lawsuit contends that the association collected dues unlawfully, charged late fees in excess of what is allowed by law and has violated its own governing documents by failing to elect an architectural committee to maintain the integrity of the community. For all those reasons, Sheldon refused to pay her assessments. When the association threatened foreclosure, Sheldon said she paid $2,086.34 under protest. Sheldon said Monday that she had dropped her suit and referred further questions to her attorney. Mark Sabbah, whose firm was representing Sheldon, said Sheldon's health did not allow her to pursue the case at this time."

Contentions and allegations made in a lawsuit are not facts and truth. They are statements made that are yet to be proved. And dropping a lawsuit often means the lawsuit was not a winning case. If there had been a successful ruling in this case, this reporter certainly would have focused on that rather than resorting to reiterating allegations that could have been made by a disgruntled owner who simply refused to pay assessments.

[Talking about SB 137 - a bill mentioned under the Legislation heading on this blog site] "The bill is identical to one she introduced last year that received strong support in both houses. It was vetoed by Gov. Schwarzenegger, who called it "overly broad" with potentially negative impacts for homeowners living in common-interest developments.”

This is a true statement. In vetoing the 2004 bill the Governor recognized that protecting the assessment stream in associations is important, and a drastic change in collection rights and remedies would be detrimental.

"People were being evicted with less due process than a tenant gets," Ducheny said. "To lose your home for these small amounts of money seemed hugely inequitable." But supporters, including association board members, say nonjudicial foreclosures are a necessary tool that allows an association to collect assessments. Joan Urbaniak, former executive director of the Greater Inland Empire Chapter of the Community Associations Institute, said, "These associations are run as businesses, and they rely on assessments to maintain amenities." Nonpayment of assessments "can cripple an association and send it into bankruptcy," Urbaniak said. [The president] Holliday of the San Ravelle association likened the loss of nonjudicial forceclosure as an enforcement tool to taking away the power of the Internal Revenue Service to tax. "The government would not survive if it did not have the power to tax," he said.”

The debate will rage on. Where will you weigh in? If you are a responsible assessment paying owner, you have the most to lose. Every dollar not collected and every dollar spent on collections of assessments from itinerant owners must be covered by sums from the Association accounts. The expenses of the association are not diminished by an owner’s refusal to pay. The Board must still provide that owner the same amenities and maintenance work as provided for other owners. Associations will have to start budgeting for uncollectible debts if the power to collect assessments is undermined by legislation. Guess who will cover the shortfall? Not the cities, counties, legislators or delinquent owners.

The purpose of this "dissection" is to illustrate that it is important to read between the lines every time an article is published in the newspaper. Reporters sell sensationalism and in doing so, strive to get the public's attention, and in the case of CID stories, often strive for disdain. However, CID living is here to stay in California and unless a better model is derived providing for leadership by paid professionals who are educated, trained and experienced (at the consumer's expense) we have to work with what is, i.e., decisions made by unpaid volunteers. Everytime a debtor is protected, society pays the price, and this is true in each separate community association which is its own "society". And the smaller the association, and the higher the delinquency rate, the harder the responsible citizens of the development are hit. These are things to keep in mind in analyzing pending legislation and news reports.

And don't believe everything you read ...

Posted by Beth Grimm at 7:01 PM