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.