Banning Criminals

Source: Adrian J. Adams Esq.

  

QUESTION: We are concerned about criminals living in our association and serving on our board. Is there anything we can do about it?

ANSWER: You raise a good topic. Several years ago, I drafted language for an association in Beverly Hills to ban felons from residing in their community. The membership passed it with lightning speed because convicted felon and accused murder Robert Durst had moved into their development.

Last year, HBO aired a documentary about him called “The Jinx, the Life and Deaths of Robert Durst.” During the filming, Durst took a break to use the bathroom where he muttered to himself (unaware his lapel mic was still live), “What the hell did I do? Killed them all, of course.”

Durst is believed to have murdered his wife Kathie, his neighbor Morris Black, and his friend Susan Berman. He is currently in jail in New Orleans on a weapons charge awaiting extradition to California for the murder of Susan Berman.

Robert Durst’s existing felony conviction is for evidence tampering, i.e., dismembering the body of Morris Black and throwing the parts into Galveston Bay. When limbs and torso washed ashore, the trail of blood led to Durst. At his trial, Durst described how he used a paring knife, two saws, and an axe to dismember his neighbor.

The Beverly Hills HOA was understandably alarmed and wanted Durst out of their association. In addition to being terrified, would they have to disclose to potential buyers that he lived in the development? If so, property values and sales could plummet.

I used the newly adopted CC&R amendment to force Robert Durst out of the community, so your question about prohibiting criminals is relevant.

Board of Directors. Barring felons from serving on boards is not uncommon (see Felons on Boards). However, a ban on “criminals” living in an association is a different matter. I will start with arrest records and move up from there.

Arrest History. Amending your CC&Rs to ban residents on the basis of their arrest history is too broad. Getting arrested does not make one a criminal. I have no doubt a court would strike down such a restriction as overbroad and unreasonable.

Criminal History. Also too broad is a prohibition of residents with a criminal conviction. It’s a bit unsettling but nearly one-third of the population in the United States has a criminal record of one kind or another. Most of them are misdemeanors. Someone who smoked pot or shoplifted 30 years ago as a teenager should not be barred from buying into an association–he/she does not represent a danger to their neighbors. HUD guidelines specifically address this issue. 

HUD Guidelines. In April 2016, the U.S. Department of Housing and Urban Development (HUD) issued a guide on how to apply Fair Housing Act standards to the use of criminal histories by housing providers. (HUD – Criminal History.) Although an association is not a housing provider, it is often viewed as such by HUD and the courts. HUD deems denial of housing based on a generic criminal history as a violation of the Fair Housing Act. According to HUD’s Office of General Counsel:

[a] housing provider that imposes a blanket prohibition on any person with any conviction record–no matter when the conviction occurred, what the underlying conduct entailed, or what the convicted person has done since then–will be unable to meet this burden [that the restriction is legitimate and nondiscriminatory].

Felony Conviction. However, a restriction on felons is enforceable if done properly. HUD guidelines provide that:

A housing provider with a more tailored policy or practice that excludes individuals with only certain types of convictions must still prove that its policy is necessary to serve a “substantial, legitimate, nondiscriminatory interest.” To do this, a housing provider must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety and/or property and criminal conduct that does not.

That means white collar felons and perjurers present a low risk to resident safety whereas a recently released violent criminal, arsonist, registered sex offender, or drug dealer could be deemed a threat.

Drug Dealers. Section 807(b)(4) of the Fair Housing Act specifically allows for denial of housing to someone convicted of the illegal manufacture or distribution of a controlled substance. The exception requires a conviction, not merely an arrest, and does not apply to other drug-related convictions, such as possession.

RECOMMENDATION. Associations can amend their governing documents to restrict certain types of criminals. If an association wants to amend their documents, boards should work with legal counsel to draft a provision that is narrowly tailored to prohibit those who represent a risk to the safety of residents or the safety of the association’s property.

Thank you to attorney Wayne Louvier in our Orange County office for researching this topic.

Two Signature Reserves

Source: Adrian J. Adams Esq.

  

QUESTION: With all the changes in banking, are we still required to have two directors sign all checks? Our management company makes an electronic transfer from our reserve account into a bill paying account once bills are approved by the board. Is that legal?

ANSWER: There has never been a requirement that all checks be signed by two directors. It has, however, been the practice that all reserve transfers be done by checks signed by two directors. That standard is steadily changing with the advent of electronic banking. Banks no longer offer two-signature accounts nor do they monitor signatures–something I addressed in a newsletter two years ago.

Reserve Transfers. Whether by design or not, the Davis-Stirling Act does not require signatures on a check. Rather, the Act requires a more nebulous requirement of two signatures to withdraw funds without specifying where or how the signatures are employed:

The signatures of at least two persons, who shall be members of the association’s board of directors, or one officer who is not a member of the board of directors and a member of the board of directors, shall be required for the withdrawal of moneys from the association’s reserve accounts. (Civ. Code §5510(a).)

The intent of the statute is to make sure two directors or a director and an officer know about and authorize the withdrawal of reserve funds. If two directors issue written instructions to the association’s management company to make a transfer, it appears the statutory requirement is satisfied.

Email Approval. Since electronic signatures are now recognized to be the same as signatures on a piece of paper, they can be used to authorize the transfer of reserve funds. Accordingly, email authorizations from two directors to the management company also satisfy the requirement. Management companies should be careful to preserve those instructions so they have a paper trail showing each transfer was authorized. Otherwise, the management company could find itself in hot water if the transfers were ever challenged.

Governing Documents. Despite the above analysis, associations should first review their governing documents before changing how they handle reserve transfers. Their CC&Rs or bylaws may contain more stringent requirements for handling reserve funds. If so, those procedures must be followed. 

RECOMMENDATION. To protect reserve funds, boards cannot rely on banks to monitor transfers. Instead, boards must adopt internal controls and carefully monitor their reserve accounts for any unusual activity. Boards still have the option of requiring all transfers be done by checks signed by two directors. Boards should consult legal counsel, their CPA, and their management company before adopting a particular policy.

Executive Session Re Vendor Performance

Source: Adrian J. Adams Esq.
QUESTION: When discussing performance issues involving a vendor, should this be done in an open board meeting or in executive session?

ANSWER: It should be done in executive session. If done in open session, negative comments about the vendor could spread through the association and get back to the person. Even worse, it could travel outside the community to others. What follows next is a threat of litigation by the vendor alleging trade libel/slander.

RECOMMENDATION: When dealing with legal issues involving a vendor’s performance and contractual obligations, executive session meetings allow free and open discussion without fear of triggering a lawsuit.

Maintenance Defined

Source: Adrian J. Adams Esq.

WHAT DOES EXCLUSIVE USE MAINTENANCE MEAN?

Association documents routinely assign maintenance duties between owners and the association. Unfortunately, exclusive use common areas are often left out or muddled.

For example, in condominium developments, older CC&Rs are vague or silent when it comes to balcony and plumbing maintenance. In planned developments, fence maintenance can be an issue.

Old Default Provision. To resolve the problem, the Davis-Stirling Act created a default provision that assigned exclusive use maintenance to owners. The Act did not define maintenance but everyone understood it to include repairs since most dictionaries define it as such.

New Default Provision. Starting January 1, 2017 a new default provision goes into effect. Unless your CC&Rs state otherwise, owners continue to be responsible for maintaining their exclusive use areas but the association will be responsible for repairing and replacing them. (Civ. Code §4775(a)(3).) By separating repairs from maintenance, the legislature created a problem. When asked about it in a recent interview, presidential candidate Bernie Sanders said, “It was huge, huge!”

Confusion Reigns. Since maintenance and repairs were once synonymous, many CC&R provisions in the 50,000 associations in California will be upended. Governing documents throughout the state were routinely drafted making owners responsible for “maintenance” without addressing repairs and replacement since they were understood.

Who Pays? What does “maintenance” mean once repairs and replacement have been stripped away? The answer is important because if owners fail to maintain something, the association must repair it. When that happens, the owner pays since he negligently failed to maintain it. Unfortunately, no one can agree what maintenance means, which means legal disputes will follow.

Maintenance Redefined. Generically, we can say that maintaining something is to preserve it in its original condition so as to prolong its life. One reserve specialist offered the following practical definition:

Maintenance means those things that can be done by unskilled individuals with household tools. Examples include sweeping a balcony and keeping the balcony drain clean.  

Repairs are typically accomplished by licensed individuals requiring specific tools, materials, or training. Examples include sealing a balcony surface to extend the useful life of that surface until it must be removed and resurfaced.

Still Unclear. Under this definition, balcony maintenance is mostly limited to keeping it clean. When I polled others in the industry, some argued that maintenance is more than sweeping a deck–it means applying or paying someone to apply a seal coat since that extends the life of the deck. The same problem relates to fences–do owners merely keep them clean or must they paint them?

RECOMMENDATION: To avoid legal wrangles, associations need to clearly define an owner’s maintenance duties for balconies, decks, patios, fences, roofs, plumbing, and other exclusive use common area items. Each association will need to decide for itself whether it wants to maintain deck coatings or assign that task to owners–and if so, what does that mean? Associations should create maintenance charts with clearly defined duties. Those with existing charts will need to update them to include more detail. Some associations will need to amend their CC&Rs.

Thank you to Robert Nordlund, CEO of Association Reserves, Inc. for raising the issue and providing maintenance definitions. Additional thanks to attorney Jay Hansen of Epsten Grinnell & Howell, attorney Wayne Louvier of ADAMS | STIRLING PLC, and Robert Browning of the Browning Reserve Group for their input on this issue.

The Volunteer

 Source: Adrian J. Adams Es
QUESTION: Ours is a 60-unit HOA. One resident has served many years as a board member, president, and rule-enforcer. She helped newcomers and everyone with all manner of issues and problems. While president she oversaw the expenditure of hundreds of thousands of dollars to restore the property after years of neglect.

A succession of community managers and vendors came to rely on her to be available, 24/7, for assistance and action. Even though she is no longer on the board, she is our institutional historian. Many consider her the go-to person. 

So, what’s the problem? She interferes with operations by telling vendors what to do or not do, delivering rules to residents who violate them, refusing to turn over keys to display cases, etc. What can be done to keep the good and stop the bad?

RECOMMENDATION: Someone who has worked that hard for the community has a sense of pride and ownership in the development. When that happens, it is sometimes hard for them to let go of direct involvement. A couple of board members should take her to lunch for a gentle conversation. Her years of service have earned her deference and praise. Let her know that her actions, while well-intentioned, create potential liability. Tell her you want to protect her from harm she may unintentionally cause herself and the association. Hopefully, that will eliminate the unwanted behavior and preserve the good. 

Architectural Control

Source: Adrian J. Adams Esq. 

QUESTION: Could you address the issue of exterior architectural control differences with a PUD and a condominium? For example: can a PUD (townhouse style) specify the windows, garage doors and front doors used in an upgrade?

ANSWER: The architectural issues between condos and PUDs are significantly different.

Condominiums. Condos care about alterations inside your unit because everything surrounding your cube of air is owned in common. That means you cannot change the structure without first getting the association’s permission. Alterations to plumbing and electrical lines are also restricted because they can dramatically affect neighboring units. Thus, it requires approval by the association. 

Planned Developments. Planned developments generally don’t care what you do inside your house. Instead, they care a great deal about exterior appearances. As a result, they regulate the color of paint you use, your fences, doors, windows, garage doors, landscaping, tree houses, and anything else that can be seen from the street or by your neighbors.

Hybrids. Townhouse developments can be a bit confusing. A townhouse is a form of construction not a form of ownership. Townhomes can be legally structured as condominiums or as planned developments. If structured as condominiums, homeowners might own air space or the entire structure depending on how it is defined. Similarly, maintenance might be defined  narrowly or expansively. It is not uncommon for a homeowner to own the structure but the association to be in charge of painting and roof repairs. 

Whether a townhouse is defined as a condominium or single family home, the exterior of the structure is controlled by the association. In all cases, the association can specify the type, color and quality of windows, garage doors and front doors used by homeowners when they upgrade.

RECOMMENDATION: If your association has not already done so, it should develop a maintenance chart in addition to clearly defined architectural standards so there is no confusion over what owners are responsible for and what they can and cannot do regarding improvements.   

Protecting Association Deposits

Source: Adrian J. Adams Esq.

On occasion, we get to cover more complicated subjects in our newsletter. This is one of them.

Wall Street Reform. Following the collapse of the economy in 2008, Congress rushed through a bloated piece of legislation known as the Dodd-Frank Wall Street Reform Act, sometimes referred to as “Dodd-Frankenstein.”

Massive Bill. The extent of the legislation was unprecedented. As the Economist Magazine* noted, “The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall Act, spread out to 37 pages. Dodd-Frank is 848 pages long.”

Associations Affected. The Economist described the reach of Dodd-Frank over the economy as one that affects “veterans, students, the elderly, minorities, investor advocacy and education, whistle-blowers, credit-rating agencies, municipal securities, the entire commodity supply chain of industrial companies, and more.” To the “and more” we can add homeowner associations.

Bail-In Provision. When the economy collapsed, the Federal Reserve used taxpayer money to bail out distressed banks that were deemed “too big to fail.” Dodd-Frank now prohibits the Fed from providing emergency funds to failing banks. Instead, distressed banks must rely on depositor funds. This is known as the “bail-in” provision. It requires banks with assets of $50 billion dollars and more (BofA, JPMorgan Chase, Union Bank, Wells Fargo, etc.) to take depositors’ money to offset losses. 

Seize Your Money. In other words, if the bank suffers losses from risky investments, it can use depositors’ money (from checking accounts, CDs, money market funds, IRAs, etc.) to cover its losses. It can bail itself out by seizing your money. Previously, banks were obligated to return your money upon demand. Now, under Dodd-Frank, you might get a share of stock in the bank instead of cash.

FDIC Insurance. Even though depositor accounts are insured by the FDIC for $250,000.00 for each depositor, the FDIC has only $67 billion in their fund to resolve account problems. The FDIC has a credit line of $511 billion with the Treasury which can be used as well. Unfortunately, derivative losses could be in the trillions of dollars. That means there will be no money to protect depositors.

Election Issue. Banking industry regulation has become a political issue between candidates Bernie Sanders and Hillary Clinton. They have clashed repeatedly on this issue in their recent debates. Bernie Sanders wants to reinstate Glass-Steagall, which was repealed by President Bill Clinton and was a factor in the collapse of the U.S. economy. Both candidates want to increase banking regulations, which could further impact an association’s deposits.

RECOMMENDATION. For associations who are risk-averse, they should consider moving their funds to smaller local banks and credit unions. To avoid the bail-in provision, the institutions should be smaller than the $50 billion dollar asset limit set by Dodd-Frank.

Thank you to Ted Loveder CMCA AMS PCAM for the genesis of this article. Ted manages one of the many highrise condominium associations we represent. Ted is part of a growing pool of talented and credentialed managers in our industry.

*The Economist, Feb 18th 2012.

Guest Speakers In The Minutes

Source: Adrian J. Adams Esq.

QUESTION: When a non-member is invited to talk to the community about projects or other items of interest, should he/she speak before the meeting is called to order? Since HOA meetings are for members only, shouldn’t the board ask any person who is not a member to ES leave?

ANSWER: You’re misreading the statute. It does not prohibit non-members from attending meetings. Rather, it confers rights on members to attend. (Civ. Code §4925(a).) Others can attend at the pleasure of the board.

Spouses, Staff & Others. Although boards can prohibit non-members, that is not the industry standard. It would be unusual to prohibit managers, support staff, and legal counsel since they assist boards in carrying out their duties. In addition to managers and staff, most boards allow spouses and renters to attend meetings and speak during open forum.

Agenda. There is nothing wrong with putting guest speakers on the agenda, calling the meeting to order and recording in the minutes that the person spoke on a particular issue. It may be important to show the board’s due diligence. It also helps keep the membership informed. The Secretary should not transcribe the speech in the minutes–only record who spoke and the topic.

RECOMMENDATION: Don’t tie your hands with a strict prohibition on non-members. First, boards need the assistance of staff and others for their meetings. Second, spouses and renters aren’t all bad. Some of them are actually interested in the well-being of the community and can be helpful. 

No Agenda Posted

Source: Adrian J. Adams Esq.

QUESTION: Recently, when posting notice of an upcoming board meeting, the agenda for that meeting was not included. Our president said it was okay because the agenda was emailed. Is that correct?

ANSWER: Sorry, it’s not correct. Starting January 1, 2008, board meeting agendas must be posted along with the notice of meeting. (Civ. Code §4920.) In the alternative, the notice and agenda can be delivered to everyone. (Civ. Code §4920.)

Email. Emailing the agenda is an option only if the recipients consent in writing to receiving notice via email. (Civ. Code §4040(a)(2).)

RECOMMENDATION: Sending agendas and notices by email makes a lot more sense than only posting in the common areas. Emails reach more people, especially those who are out of town or live elsewhere. Associations that want to save money and keep members better informed should get owners’ email addresses and written consent to send notices. By “notices” I mean more than just board meetings. There are a great many disclosures and notices that associations must give members each year.

Executive Session Without the Manager

Source: Adrian J. Adams Esq. 

QUESTION: Can our board meet independently, without the manager present, and without advertising the meetings to discuss, interview, and hire a new management company?

ANSWER: It’s the board’s meeting not the manager’s. So, yes, directors can meet without the manager. However, the board still needs to give notice of the meeting. It may be a little awkward since the manager may suspect or know the purpose of the meeting. Even so, the Davis-Stirling Act does not provide an exemption for awkwardness–only for emergencies.

Interviews. In most instances, the board can simply tell the management company they are unhappy with their performance and plan to interview other companies. If the board is paranoid their manager will sabotage things, it can appoint less than a quorum of directors to interview other companies. The committee can then meet without notice and make a recommendation to the full board for action once it finds the right company.

RECOMMENDATION: Before interviewing other companies, the board should first have legal counsel review the management contract and advise on how best to proceed. Otherwise, the association may find itself in breach of contract and liable for damages.

Unplanned Reserve Component

Source: Adrian J. Adams Esq. 

QUESTION: Should an improvement not listed on the reserve study be paid out ofthe operating account? We had to modify the drains on a deck above the garage.

ANSWER: Whether you pay from operations, use reserve funds, or special assess depends on the cost.

Small Cost. Some components are left out intentionally because, relative to the association’s annual budget, the cost to replace is too small to include in the study. In that case, you pay out of operations.

Moderate Cost. Sometimes components are left out by mistake. If the cost is moderate and the reserve account healthy, reserve funds can be shifted between components and the missing item added to the study.

Significant Cost. If, however, the impact on the reserve account is significant because the cost to repair is high or the reserves are underfunded, the board may need to borrow from reserves and levy a special assessment to repay the account.

RECOMMENDATION: If you use reserve funds previously allocated to other components, make sure you notify your reserve specialist so he can make appropriate adjustments to the study.

Thank you to Les Weinberg of Reserve Studies Incorporated for his assistance with this question.

Scandalous Dues Increase

Source: Adrian J. Adams Esq.

QUESTION: What takes precedence in our governing documents? Our bylaws clearly state our yearly dues CANNOT exceed $36.00 a year, yet the CC&Rs say the board can raise them up to 20% each year. Last year the board raised our dues by 20% and again this year they raised them another 20% so they are now $51 per year. Can they do that?

ANSWER: Asking you to pay 98 cents a week for association services is scandalous. It took my breath away. But then I remembered that boards have a fiduciary as well as a statutory duty to levy regular and special assessments sufficient to perform their obligations under the governing documents and the Davis-Stirling Act. (Civ. Code §5600.) Before you break out the torches and pitchforks, you should review your association’s budget. I suspect the board was forced to raise your assessments to such outrageous levels to deal with deferred maintenance and higher insurance costs.

Hierarchy. You mentioned a conflict between your CC&Rs and bylaws. The $36 annual cap in your bylaws is trumped by the 20% dues increase in your CC&Rs. New Civil Code §4205 states that any conflict between the governing documents sets the priority as follows: CC&Rs, articles of incorporation, bylaws, and then rules. In addition, the “Notwithstanding” language in Civil Code §5605(b) voids the $36 cap, i.e., the statute trumps your bylaws. Either way, the $36 cap is dead. 

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Elections In Small Associations

Source: Adrian J. Adams Esq.

QUESTION: We are a small 6-unit condominium project. Each owner is a board member. Can we waive the secret ballot requirements for assessments and modifications to the governing documents? 

ANSWER: The Davis-Stirling election requirements are particularly burdensome on small associations. There have been discussions in Sacramento about exempting small HOAs but, to date, that has not happened. 

Informal Elections. Some small associations have taken matters in their own hands and unilaterally dispensed with the voting requirements. They get together each year in the living room of one of their units and, by consensus, declare all the owners elected to their respective seats. They do the same thing for assessments and amendments, i.e., decide such matters via voice votes. If someone wants secret ballots, they circulate slips of paper, write down their votes, fold the slips and pass them to the Secretary (or a spouse) to tally the results. 

RECOMMENDATION: I can’t recommend the practice since it violates the Act. I’m simply reporting how some associations handle the problem.

Recall Legal Fees

Source: Adrian J. Adams Esq. 

QUESTION: A petition to recall the board was presented to our management company. The board then met in closed session with an attorney “to advise the board on possible scenarios and solutions.” Who pays the attorney?

ANSWER: Board members are volunteers and rarely know how to properly handle a recall petition/election. As a result, it is common for them to call legal counsel to find out what to do.

Common Questions. Following is a sampling of questions I get when boards are served with a petition:

• If a husband and wife both sign the petition does it count as one signature or two?
• Can/should the board verify the signatures? If so, how?
• Is the petition confidential or should it be published?
• How much time do we have to call a recall meeting?
• How are nominations handled?
• Do recalled directors have the right to run for the board?
• And so on…

Legal Fees. Since legal counsel is important in such matters, it is proper for the association to pay for the advice. The last thing you want is a botched recall and a lawsuit.

Political Issue. If, however, the board is meeting with the association’s attorney for strategies on how to defeat the recall, that’s a political question and inappropriate for legal counsel to be involved in. Boards have the right to fight a recall but not with association resources.

RECOMMENDATION: The unavoidable side-effects of a recall are higher expenses involving management, inspectors of election, and legal. One way to reduce the cost is to revise election rules to incorporate procedures for handling recalls. Having a written policy eliminates some (but not all) of the cost, emotion, and suspicion surrounding recall elections.

11-Year Old Board Member

Source: Adrian J. Adams Esq. 

An attorney in Virginia recently raised an issue about an eleven-year old girl who submitted an application to run for an open seat on the board of directors of a large association.

Concerns. The attorney was concerned that, as a minor, (i) could she approve or execute contracts, (ii) would the board’s D&O insurance cover a minor, and (iii) would the same duties of loyalty and care apply to a minor’s decisions?
No Restrictions. In California there are no age restrictions for serving on a board of directors. The Davis-Stirling Act and the Corporations Code are silent on the issue. That means an 11-year old could be elected to an HOA board unless the governing documents stated otherwise.

Contract Issues. The problem with minors on HOA boards is their right to disaffirm contracts they enter into. (Civ. Code §6710.) Even though the association is the party entering into a contract, if a minor on the board were the deciding vote approving a contract, could she later disaffirm the contract? This is uncharted territory that could result in litigation if that were to occur.

Fiduciary Duties. Upon their election to the board, directors are held to a higher standard. Would that standard apply to an 11-year-old? If criminal courts don’t treat minors the same as adults, it’s unlikely civil courts would either. Even though the minor would not be liable for her actions, the association would. How does that affect insurance coverage?

RECOMMENDATION: Because of legal uncertainties created by a minor on the board, associations should set a minimum age as a director qualification. It can be done via a rule change to the Election Rules or by amending the bylaws. In California, members of the Legislature must be over 18 years of age. Most other states use 21 for their lower house and 25 for the upper house.

Christmas Bonus for Employees

Source: Adrian J. Adams Esq. 

QUESTION: According to an article in last week’s LA Times, boards cannot give year-end bonuses to employees without membership approval. And even then it may affect the association’s tax status. Our HOA has been giving bonuses for years. Are directors in breach of their fiduciary duties? Will we lose our tax status?

ANSWER: I received multiple emails about the LA Times article. I thought people had misread it so I looked it up online. Unfortunately, the Times article is a train wreck.

No Violation. Contrary to dire warnings by the Times writers, boards can give year-end bonuses to employees. Doing so is not a breach of their fiduciary duties and does not affect their tax status.

Christmas. Boards can even call them Christmas bonuses if they want. I know it’s politically incorrect and sends the PC police over a cliff but using the word “Christmas” does not violate the constitution. Christmas happens to be a national holiday.

Personnel Issues. Boards have the authority to hire employees and contract with vendors to provide services to the membership. This power is found in virtually every set of bylaws I’ve ever reviewed. In addition, associations (through their boards) “may exercise the powers granted to a nonprofit mutual benefit corporation” unless the governing documents specifically provide otherwise. (Civ. Code §4805(a).) This gives broad powers to boards to act on behalf of their associations.

Compensation.The authority to hire employees and contract with vendors means boards can pay for those services. An employee’s compensation can include year-end bonuses, either as part of a negotiated compensation package or as a reward to employees for rendering exemplary service to the association. Boards do not need membership approval for this. The Davis-Stirling Act specifically makes personnel and contract issues executive session topics for boards to address to the exclusion of the membership.

Case Law. The board’s authority to use HOA money for more than just repairing common areas came before the courts in Finley v. Superior Court. In that case, a board used HOA funds to fight the conversion of a nearby military base into a commercial airport. Members of the association sued claiming this was a misuse of their funds and exceeded the board’s authority. The court found that political contributions were not illegal and that boards can take actions they believe are in the best interests of the association, even if members disagree.

Benefits the Association. The Business Judgment Rule relieves directors of personal liability if their decisions are in error, provided they are in good faith and in the best interests of the association. In this case, employee bonuses benefit the association. It establishes good will with employees, promotes stability in the workforce, and encourages good work. Disaffected employees and high turnover are clearly not in the association’s interest—they can be far more costly to an association than a year-end bonus.

Tax Status. Giving a bonus to employees will not result in tax penalties or the loss of an association’s status as a nonprofit mutual benefit corporation. If boards have any concerns on this point, they should contact their association’s CPA.

RECOMMENDATION: Boards should not feel guilty about giving their employees a year-end bonus. And, they should seek legal counsel from legitimate sources.

Deadlocked Board

Source: Adrian J. Adams Esq. 

QUESTION: Upon a resignation, can you tell me how a new director is chosen when the appointment process is tied 3-3 with the remaining board members?

ANSWER: If they can’t agree on a replacement, the board can put the seat up for special election. Only once have I had a board so thoroughly deadlocked that they could not agree on anything. It completely paralyzed operations.

Petition. When that happens, the Corporations Code provides that any director or members holding not less than 33 1/3 percent of the voting power may petition the court appoint a provisional (i.e., temporary) director to break the deadlock. (Corp. Code §7225(a).) The petition is fairly straightforward and is given priority by the courts. If unopposed, the appointment can be done within 30-60 days, depending on the court’s schedule.

Powers & Compensation. A provisional director has all the rights and powers of a director until the deadlock is broken or until removed by an order of the court or by approval of a majority of the membership. The director is entitled to compensation as determined by the court unless otherwise agreed with the association. (Corp. Code §7225(d).) Either way, the association picks up the tab.

RECOMMENDATION: The membership should pressure the board for a special election. It avoids the expense of a provisional director.