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.