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New-Newsletter-Template-300x167In case you missed it, Issue # 48 of our ‘Community Association Update’ newsletter is available now!

Topics covered in this issue include:

  • SB 908 – Debt Collection Licensing Act
  • AB 3182 – Rental or Leasing of Separate Interests
  • AB 1885 – Homestead Exemption
  • Insurance Company Denies Defense to Managing Agent Who Was Not an Additional Insured on the Policy
  • The Business Judgment Rules:  Inapplicable as to Decisions Made Under a Material Conflict of Interest
  • Lawsuits are Generally Protected Activity
  • Branches Decision Overturned as it Violates Public Policy

A link to the newsletter is here.

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Jasmine-Creek-300x168It’s our privilege to welcome Jasmine Creek Community Association to Tinnelly Law Group’s growing family of HOA clients.

Situated on the hillsides of Corona Del Mar, CA, Jasmine Creek is a gated community consisting of 324 homes. At a time when most builders “go vertical” to maximize available space, the community of Jasmine Creek stands apart with its lush greenbelts and open spaces. From its inception, Jasmine Creek has provided an oasis of calm while located close to Newport Center and the Pacific Ocean.

hoa law firm Our HOA lawyers and staff look forward to working with Jasmine Creek’s Board and management.

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Image-1-1024x654-1*New Case Law

Many homeowners associations (“HOA”) are professionally managed by a managing agent (“Manager”). The Manager is generally tasked with the obligation of carrying out the decisions of the HOA’s Board of Directors (“Board”), as well as day-to-day operations of the HOA. Because they operate as an agent of the HOA, most Managers require the HOA to indemnify them from any claims, damages and losses arising out of Manager’s performance, except to the extent that such claims, damages or losses are the result of Manager’s gross negligence or willful misconduct.  Because of this indemnification obligation, HOAs typically name their Manager as “additional insured” under the HOA’s commercial general liability insurance policy (“CGL Insurance”). If the HOA and Manager are sued, and there is potential coverage under the policy, the insurer will provide a defense for both the HOA and Manager (at the insurer’s expense). However, as one HOA recently learned, it is equally important to name Manager as additional insured under its Directors and Officers insurance policy (“D&O Insurance”).

In Auburn Woods I Homeowners Assn. v. State Farm General Ins. Co., an owner brought a lawsuit against Auburn Woods I Homeowners Association (“Auburn”) and its Manager alleging various improprieties with Auburn’s collection practices. (2020 Cal.App.Unpub.LEXIS 6323, **4-5.) The owner sought declaratory and injunctive relief, as well as an accounting. (Id. at p. *4.) Auburn’s insurance carrier, State Farm General Insurance Company (“State Farm”), denied the tender of the claim concluding that the claims were not covered under both the HOA’s CGL and D&O Insurance. (Id. at p. *7.) Auburn successfully defended against the owner’s lawsuit. (Id. at p. *8.)

Undeterred by Auburn’s success, owner filed a second lawsuit against Auburn and Manager, requesting that the trial court set aside the foreclosure sale that had taken place, as well as other forms of relief. (Id.) Auburn tendered the action to State Farm who denied the claim under Auburn’s CGL Insurance but accepted the claim as to Auburn only under its D&O Insurance; State Farm refused to provide Manager with a defense thereby requiring Auburn to defend Manager at its own expense pursuant to Manager’s full-service management agreement. (Id. at p. *9.) Again, Auburn successfully defended against the owner’s lawsuit. (Id. at p. *10.)

Shortly thereafter, Auburn and Manager filed a lawsuit against State Farm for breach of contract, claiming, among other things, that State Farm had breached the terms of Auburn’s D&O Insurance policy when it refused to provide a defense for Manager. (Id.) The trial court agreed with State Farm’s position, holding that Manager was not named as additional insured therefore relieving State Farm of its obligation to defend. (Id.) The Court of Appeal affirmed the trial court’s decision. In affirming the trial court’s decision, the Court disagreed with Auburn’s argument that the “declarations page…clearly showed [Manager] was an additional insured under [the D&O Insurance],” noting that the “declarations pages did not mention [Manager]” (id. at p. *27); in other words, Manager was not clearly listed as an additional insured under the D&O Insurance.   The Court further disagreed with Auburn’s argument that its insurance agent had a contractual duty to provide Manager with D&O Insurance coverage. (Id. at pp. **27-28.)

California HOA lawyers This case is important because it highlights the need for an HOA to include its Manager as additional insured not only on the HOA’s CGL Insurance, but also its D&O Insurance. HOAs should therefore inquire with their insurance agent to confirm adequate coverage in light of the Court’s holding in Auburn.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

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conflict-of-interest-25e7ab7068414ab080d7563821681049*New Case Law

Under the Business Judgment Rule, volunteer directors are shielded from liability for decisions made when those decisions are (1) consistent with the director’s duties, (2) made in good faith, and (3) in a manner it believes to be in the best interests of the HOA and its members. (See Lamden v. La Jolla Shores Clubdominium HOA (1999) 21 Cal.4th 249, 265; see also Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal. App. 4th 965, 979.) However, as clarified in the recent case of Coley v. Eskaton, the Business Judgment Rule does not uphold decisions made by directors “acting under a material conflict of interest.” ((2020) 51 Cal.App.5th 943 (“Coley”).)

In Coley, a homeowner Board member (“Owner Member”) brought legal action against the homeowners association (“Association”), two directors (collectively, “Directors”), and the Directors’ employer (Eskaton, Eskaton Village-Grass Valley, and Eskaton Properties, Inc.) (“Employer”) alleging, among other things, that the Directors “ran the [A]ssociation for the benefit of the Eskaton entities rather than the [A]ssociation and its members” in breach of their fiduciary duties. (Id. at p. *1.) In particular, the Directors were paid by Employer and “receive bonuses and incentive compensation in part based on the Eskaton Properties’ performance. Eskaton Properties’ performance, in turn, is based in part on Eskaton Village’s performance.” (Id. at p. *5.) Thus, the Directors were incentivized to ensure that the Eskaton Village performs well despite the impact said performance would have on other communities located within the Association development (i.e., the “Patio” homes).

In support of his allegations, Owner Member provided evidence that Directors improperly “voted to require the Patio homeowners to cover 83 percent of the cost associated with security services,” as well as imposed an assessment on the Patio homeowners to cover litigation expenses. (Id. at p. *7.) The result was a financial benefit to the Eskaton Village (and subsequently, the Directors). Additionally, one of the Directors improperly shared the Association’s attorney-client privileged information with Employer and Employer’s legal counsel. (Id.)

Employer and Directors objected to Owner Member’s argument that the foregoing actions constituted a breach of Director’s fiduciary duties to the Association and its members. In support of their objection, they argued that Owner Member failed to adequately demonstrate that Directors’ conduct “was motivated by specific self-interest,” that Directors “benefited from their breach of fiduciary duty,” and that Directors’ actions “amounted to mismanagement of the [Association].” (Id. at p. *51.) However, the Court of Appeals rejected Employer/Directors arguments concluding that “[o]nce [Owner Member] established the existence of a fiduciary relationship, breach of fiduciary duty, and damages, he was entitled to damages absent some applicable affirmative defense.” (Id. at p. *55.)

The Court noted that Owner Member satisfied this burden: (1) Directors, as members of the Board of Directors for the Association, owed fiduciary duties to the Association and its members; (2) Directors breached those duties by: (a) requiring Patio owners to pay a greater share of the security-services fees and legal fees” in violation of the CC&Rs, and (b) disclosing Association’s attorney-client privileged communications with Employer and Employer’s legal counsel; and (3) Owner Member (and other Patio owners) were injured as a result of the breach. (Id. at pp. **52-55.) And, as noted earlier, the Business Judgment Rule defense did not apply because Directors were acting under a material conflict of interest. As a result, liability was imposed against both Employer and against each Director personally.

California HOA lawyers This case is important because it highlights the fact that, while the Business Judgment Rule will ordinarily protect individual directors from liability for decisions made, it does not extend to decisions made while acting under a material conflict of interest. Directors therefore should refrain from participating in the decision-making process when a conflict of interest exists in order to avoid personal liability exposure.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

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8-things-you-should-know-about-living-featuredThe homestead exemption protects the value of a homeowner’s primary residence in the event of a bankruptcy. Specifically, it provides that a specified portion of equity in a homestead is exempt from execution to satisfy a judgment debt. Existing state law prescribes that the amount of this homestead exemption is $75,000 for single homeowners, $100,000 for married homeowners, or $175,000 for homeowners who are seniors and/or disabled. (Code Civ. Proc., § 704.730(a).)

Since the inception of the homestead exemption, California Courts have liberally construed declarations of homestead. (see Johnson v. Brauner (1955) 131 CA2d 713, 722, 281 P2d 50.)  California Courts have taken this lenient approach because ‘the law and facts to promote the beneficial purposes of the homestead legislation to benefit the debtor’” [Phillips v. Gilman (In re Gilman) (9th Cir. 2018) 887 F3d 956, 964 quoting Tarlesson v. Broadway Foreclosure Invs., LLC, 184 CA4th 931, 936, 109 CR3d 319 (2010)]. Emphasis added.) However, existing law does not provide for any modifications or adjustments to account for inflation. The legislature has identified this oversight and provided an avenue for correction to this approach.

On September 18, 2020, Governor Newsom signed Assembly Bill No. 1885 (“AB 1885”), which drastically modifies a debtor’s protection in their homestead in the event of a bankruptcy. AB 1885, which took effect January 1, 2021, makes two (2) important changes:

  • Makes the homestead exemption the greater of $300,000 or the countywide median sale price of a single-family home in the year prior to the year in which the judgment debtor claims the exemption, not to exceed $600,000.
  • Adjusts annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

While the sharp increase in the value of the homestead exemption may be staggering at first blush, AB 1885 is adjusting state law to account for the drastic increase in property values that California has experienced over the past several years.

The Effect of a Homestead Exemption

A declared homestead limits the extent to which a subsequently recorded judgment lien, other than a judgment lien based on a judgment for child or spousal support, will attach to the declared homestead. As a result, a judgment lien attaches only to the surplus value of the property over the amount of the homestead exemption, plus the amount of all liens and encumbrances on the declared homestead at the time the abstract of judgment is recorded to create the judgment lien. (Code Civ. Proc., § 704.950; see also Code Civ. Proc., § 487.025(b).) Thus, if there is no “surplus equity” when the judgment lien is recorded, the judgment lien may not be enforced to any extent.

Additionally, the homestead exemption applies to any interest of the judgment debtor in a homestead [Code Civ. Proc., § 704.720(a)] and to all procedures for enforcement of a money judgment [Code Civ. Proc., § 703.010(a)].

In light of the foregoing, bankruptcy courts may experience an increase in bankruptcy filings for homeowners struggling with mounting debt but have built equity in their home.

The Impact on Assessment Collections

As a result of AB 1885, our office has been receiving various inquires regarding how this will impact assessment collection. In short, AB 1885 will only have an impact on an HOAs ability to satisfy a delinquent account if the delinquent Owner files bankruptcy. While AB 1885 may reduce some potential revenue sources to satisfy the debtor’s creditors, there are still various collection options available.

California HOA lawyers To ensure your HOA is taking all appropriate measures to secure debts and collect from delinquent Owners, contact your attorney for individual case analysis.

-Blog post authored by TLG Attorney, Corey L. Todd, Esq.

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41-West-300x168It’s our privilege to welcome 41West Owners Association to Tinnelly Law Group’s growing family of HOA clients.

41West is a new highrise condominium building in the Banker’s Hill neighborhood of San Diego. Residents enjoy a pool, spa, fitness center, clubhouse, and extensive greenbelts.  Residents enjoy a full featured resident lounge, with a theater and golf simulator; fitness center; and views of the bay, city, and Balboa Park.

hoa law firm Our HOA lawyers and staff look forward to working with 41West’s Board and management.

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calculating-budget2020 has strained the purse strings of California homeowners associations. When the pandemic hit in March, it forced HOA’s into uncharted territory, which resulted in unanticipated legal fees to address a myriad of issues such as how to conduct meetings, enforce the governing documents, and maintain common areas during state-ordered shelter-in-place directives.

As restrictions were lifted, re-imposed, and continuously adjusted, HOA’s needed the advice of counsel to determine how to best navigate the fluid landscape of COVID-19 regulations. When the heat of summer arrived and quarantine-fatigued residents were demanding pool re-openings, Boards had to consider whether to adopt emergency rules to safely and legally reopen community facilities, again with the assistance of legal counsel. COVID-19 regulations also required increased cleaning and sanitation measures, which were further unanticipated costs.

The pandemic has also resulted in unemployment and reduced incomes for millions of Californians, many of whom live in HOA’s and pay assessments. Government programs have been supplementing unemployment benefits, providing stimulus checks, and issuing emergency loans, but this temporary relief is not unlimited and many fear we are heading toward a crash similar to 2008 where Associations were faced with a wave of delinquent assessments.

As 2020 nears its end, many California communities are finding themselves over budget. Pursuant to Civil Code § 5600, Directors have a duty to levy regular and special assessments sufficient to perform their obligations under the governing documents, which includes maintaining the common areas. To this end, Boards will need to evaluate how to best accomplish this task within budgetary constraints, focusing on safety as a first priority and possibly putting off larger, non-urgent projects until the pandemic has subsided and the economy has begun to recover.  If the community facilities are too costly to safely remain open, Boards may consider closing them or increasing assessments to offset the increased sanitation, cleaning, and monitoring costs if they decide to keep the facilities open.

California HOA lawyers Boards should review their financials closely with management and their accountant to determine where they may be able to cut costs and/or increase assessments to operate within budget. Although directors may be sympathetic to owners experiencing financial hardship, Boards have a duty to collect assessments and the failure to collect places a burden on the paying members who may be subject to increased assessments and reduced services to cover budgetary shortfalls. To protect against this, boards must record liens on delinquent owners and initiate collection actions. Associations should retain the services of a competent collection firm for these purposes.

-Blog post authored by TLG Attorney, Carrie N. Heieck, Esq.

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Sparrow-at-Marsh-Creek-300x168It’s our privilege to welcome Sparrow at Marsh Creek Owners’ Association to Tinnelly Law Group’s growing family of HOA clients.

Sparrow at Marsh Creek is a new single family home development by KB Home in Brentwood. Residents enjoy a pool, spa, fitness center, clubhouse, and extensive greenbelts.  Residents enjoy the planned community park, with its grassy open space, play equipment, and shade structures with dining areas, as well as nearby Sunset Park Athletic Complex, a nearly 38-acre sports complex featuring several baseball and soccer fields and a barbecue area.

hoa law firm Our HOA lawyers and staff look forward to working with Sparrow at Marsh Creek’s Board and management.

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Manana-300x168It’s our privilege to welcome Manana Homeowners Association to Tinnelly Law Group’s growing family of HOA clients.

Manana is a collection of condominiums located in the city of Orange. Residents enjoy a pool, spa, fitness center, clubhouse, and extensive greenbelts.

hoa law firm Our HOA lawyers and staff look forward to working with Manana’s Board and management.

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4e035fcb658a82042cd48a551b4f1b6b*New Case Law

Under California law, a Strategic Lawsuit Against Public Participation (“SLAPP”) is a lawsuit brought against a defendant as a form of punishment for engaging in protected activities. When such lawsuits are filed, the defendant may bring an “anti-SLAPP” motion to strike the plaintiff’s suit. In order to prevail on such a motion, the moving party must demonstrate that the plaintiff’s lawsuit arises from its protected activities. Once the moving party has made such a demonstration, the plaintiff may defeat the motion by showing the lawsuit has merit. Such a battle was recently fought in the case of Third Laguna Hills Mutual v. Joslin. ((2020) 49 Cal. App. 5th 336 (“Third Laguna”).)

In Third Laguna, a homeowners’ association, Third Laguna Hills Mutual – an active adult community (“Association”), brought an action against a homeowner, Jeff Joslin (“Owner”), alleging, among other things, violations of the Association’s governing documents. Joslin had apparently rented out his separate interest to unqualified persons (i.e., “nonseniors”) who then caused nuisance violations (e.g., playing loud music). In response, Joslin filed a cross-complaint against the Association, alleging various tort theories. The Association labeled Joslin’s cross-complaint as a SLAPP suit and filed an anti-SLAPP motion.

In support of its anti-SLAPP motion, the Association argued that Owner’s cross-complaint was in response to the Association’s “protected activities and communications;” in other words, the “pre-litigation threats and the filing of” the Association’s lawsuit. The Association further argued that enforcement of the Association’s CC&Rs “is a public issue and an issue of public interest” falling within the ambit of the anti-SLAPP statute. The Court disagreed, siding with the in pro per Owner.

In denying the Association’s anti-SLAPP motion, the Court reasoned that the tort claims alleged in Owner’s cross-complaint clearly “arose from the [Association’s] decisions and actions” (e.g., preventing Owner from renting out his unit), not “from the [Association’s] filing of the complaint.” Moreover, and although the Association is relatively large, enforcement of the CC&Rs “is not a public issue or an issue of public interest within the meaning of the anti-SLAPP statute.” Because Owner prevailed, he was awarded his costs on appeal.

California HOA lawyers This case is important because it highlights the need for a HOA to perform a careful and thorough evaluation, not only of the merits of a lawsuit prior to filing, but of all subsequent procedural actions taken during the pendency of the lawsuit.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

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