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Articles Posted in Boards of Directors

downloadConflicts of interest present possible liabilities that homeowners associations (“HOAs”) should do their utmost to avoid.  There are issues that need to be deliberated and decided upon by the Board of Directors; however, in some situations, not all Directors should take part in the decision-making.  A common scenario includes a situation where the Director might have a material financial interest in the outcome; or, the Director is violating the governing documents and should not decide on their own disciplinary consequences.  Therefore, to keep all lines of communication and responsibilities clear, the Board should watch out for potential conflicts of interest and take the necessary steps to insulate the HOA and the Director from actual conflicts of interest.  Some further examples of both potential and actual conflicts of interest could include:

  • Property damage to common areas abutting a Director’s property.
  • HOA litigation matters that could directly implicate a Director.
  • Capital improvements to common areas that would be advantageous to Directors.
  • The HOA contracting with vendors who have prior relationships with Directors without properly being vetted by neutral parties and/or management.
  • Using HOA funds to involve legal counsel to aid in a personal vendetta between a Director and HOA member.

What Should the Board Do If There Is A Potential Or Actual Conflict Of Interest?

Pursuant to Corporations Code section 7212, the Board may, by resolution adopted by a majority of the number of Directors then in office, provided that a quorum is present, create an executive committee consisting of two or more Directors, to serve at the pleasure of the Board.  The Board has complete control over all committees.  This means that the Board will decide who may serve in the committees and what authority they will have, subject only to the restrictions in the governing documents.

Accordingly, if there were any potential or actual conflicts as mentioned above, legal counsel for the association should broach the idea of the Board creating an executive committee around the conflicted Director.  While Directors are well-meaning, if their financial interests, property, or personal self are implicated in any way, it would be difficult for the respective Directors to act as a Director (i.e., in good faith and in the best interest of the HOA) and not as a homeowner.  This could be quite detrimental for the HOA and possibly even for the Director themselves because if there is an actual conflict of interest, that Director would be exposing themselves to personal liability; and the HOA’s Directors and Officers insurance might not be applicable if the Director acted outside the scope of their duties and decided on matters in such a way that would not benefit the HOA.

Therefore, it would be prudent to resolve any potential conflicts of interest by removing the Director from any decision they might be personally involved in and forming an executive committee around that respective Director.  Should the Board have difficulty with this task, it might be best to enlist legal counsel’s help in explaining liabilities and conflicts of interest to all parties involved.

California HOA lawyers Note that if an executive committee is comprised of enough Directors so as to establish a quorum of the Board, any meeting of that committee could constitute a Board meeting that is subject to the Open Meeting Act’s requirements.  Additionally, executive committees must maintain minutes pursuant to Civil Code section 5210 and make them available for inspection by the members within fifteen (15) days following approval.

-Blog post authored by TLG Attorney, Vivian X. Tran, Esq.

BoardMeetings_Blog-2-1-1*Asked and Answered

Asked Can the Board reconsider a motion that was previously passed by a majority vote? One of the directors that voted in opposition to the motion would like the Board to reconsider.

Answered – One of the Board’s primary responsibilities is to make decisions on behalf of the association. Because the Board is comprised of volunteers with different backgrounds and varying expectations, it is common for Board members to disagree from time-to-time. The directors on the “losing side” of a motion may have concerns over the decision made, feeling that the decision was rushed and made without proper inquiry or consideration of all relevant facts. Those who are on the “winning side” of a motion may learn additional facts which calls into question the decision made. Either way, the question then becomes whether the Board is “stuck” with the decision made.

Although an association is not required to adopt and employ parliamentary procedures to govern Board meetings (unless otherwise required by the association’s governing documents), the Robert’s Rules of Order provides a procedure the association can adopt and use in addressing situations where a Board member requests reconsideration of a previously decided matter. Because it is considered an “unusual” motion, and to prevent abuse from the “losing side,” the motion should be limited to those directors that voted on the prevailing side. So, in the question posed, the director voting in opposition to the motion is unable to make a motion to reconsider. The director must then convince one or more of the directors on the prevailing side to bring the motion. The motion must be made at the Board meeting following the meeting in which the decision was made.

Once the motion is made by a Board member on the prevailing side (the moving party should be required to indicate that they voted on the prevailing side), it must be seconded. However, the second can be made by any Board member, regardless of how they voted on the matter to be reconsidered. Once a motion is made and seconded, the matter is “up for debate.” In order for the motion to carry, a majority of the Board must vote in favor of the motion to reconsider. Note, this motion does not overturn the previous decision. Rather, it simply allows for the previous decision to be reconsidered by the Board (i.e., a new vote to be made on the previous decision). Thus, if the motion passes, the original motion is placed before the Board as if it never happened.

The following is a sample script on the motion to reconsider:

Prevailing Vote Board Member: I move to reconsider the vote on the motion to grant Owner’s reimbursement request. I voted on the prevailing side.

Board Member: I second that motion.

Board President: It is moved and seconded to reconsider the vote on the motion to grant Owner’s reimbursement request. Is there any discussion on reconsidering the vote?

After discussion has occurred the Board President calls for a vote. If, as noted above, the motion passes, the original motion is placed before the Board for discussion and a vote. If the motion fails, the decision made on the original motion stands.

California HOA lawyers Parliamentary procedure is complex and often confusing. Such rules seem archaic and draconian. Nevertheless, it is important for the Board to adopt and adhere to such procedures to avoid wasting time discussing matters that have already been decided.

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

*Asked & Answered

recall-WEBAsked – We recently completed our annual meeting/election where approximately ninety-four percent (94%) of the membership participated. Almost immediately thereafter, we received a petition to recall the Board of Directors (“Board”). Must our association go forward with the recall election? What alternate options are available to the Board?

Answered – Most common interest developments (“CIDs”) are formed as nonprofit mutual benefit corporations. Under California’s nonprofit corporation law, “any or all directors may be removed without cause” (Cal. Corp. Code § 7222 (emphasis added)); meaning that directors can be removed by the membership for any reason, or no reason at all. In order to initiate the recall process, five percent (5%) of the membership may submit a petition to the CID (usually addressed to its president) requesting that a special meeting of the membership be noticed for the purpose of recalling the Board (or any director). The notice requirements are addressed in California Corporations Code section 7511(c).

Recall elections can disrupt the effective operation of the CID and are often a costly endeavor. And, in most cases, such efforts fail to achieve the petitioning members’ desired objective—the removal of the Board. This is especially true in situations where the CID’s Bylaws allow for cumulative voting and members try to recall individual directors. (See Removal & Recall of Directors – Individual Director or Directors.) Nevertheless, under most circumstances, the CID must take action in response to a petition to recall the Board. However, based on the facts contained in the question presented, there may be other options available. The three options available in response to a valid recall petition are:

  1. Perform only those acts required to conduct a recall election;
  2. Do nothing in response to the petition other than to inform the petitioners that the Board has elected not to take action; or
  3. Perform all acts necessary to hold a recall election and concurrent director election.

Each option will be discussed in turn.

Option #1 – Perform only those acts required to conduct a recall election.

According to the facts provided in this question, the petitioning members have submitted a petition to recall the Board. The petitioning members have not also requested that a director election be held in the event the recall is successful. Thus, the Board could simply notice a special meeting of the membership to recall the Board without soliciting membership votes on replacement directors. This approach is problematic for the CID.

Under California Corporations Code section 7220(b), a director continues to serve until their successor is elected, “unless the director has been removed from office.” Thus, if the recall is successful, all directors immediately cease being on the Board; in other words, the CID will be without a Board. Failure to have a Board violates California Corporations Code section 7210, which states that “[e]ach corporation shall have a board of directors.” (Emphasis added.) Moreover, without a Board, the CID will be significantly prejudiced; it will not be able to carry out its obligations under California law and its governing documents (e.g., maintenance may cease, rule enforcement ends, the CID will be unable to respond to lawsuits, etc.).

Since the CID will be without a Board, members will be forced to file a petition with the Superior Court for the appointment of a receiver pursuant to California Code of Civil Procedure section 564(a)(9). The receiver will then manage the affairs of the CID and will initiate the procedure to conduct a director election. This, of course, is problematic in several respects.  First, receivers are paid for their services. Most CIDs do not have adequate financial resources to cover unanticipated expenses. The receiver therefore may be forced (and will have the authority) to levy an emergency special assessment. Second, the receiver’s objectives are not usually in line with the interests of the CID’s members.

In light of the foregoing concerns, it would not be in the CID’s best interest to proceed in this fashion (i.e., conduct the recall election without a concurrent director election).

Option #2 – Do nothing in response to the petition other than to inform the petitioners that the Board has elected not to take action

Based on the information given, this option may be reasonable under the circumstances, especially given the overwhelming voter turnout (approximately ninety-four percent (94%) of the membership participated in the election). If such option is selected, the petitioning members will have the option of giving notice of the special meeting pursuant to California Corporations Code section 7511(c), or may petition the Court to require that such notice be given by the CID. Either way, the petitioners will be required to obtain a Court order directing the CID to prepare and distribute ballots as the petitioners do not have such authority. (See Cal. Civ. Code § 5115 (“Ballots and two preaddressed envelopes with instructions on how to return ballots shall be mailed by first-class mail or delivered by the association to every member….”).)

This option, while seemingly reasonable, raises similar concerns referenced above. To the extent members petition the court for an order compelling the CID to take action in response to the petition (including providing notice and preparing/distributing balloting materials), the CID will incur significant legal fees in defense of its position in this matter (unless insurance-appointed defense counsel steps in to provide a defense). And, in the event the petitioners are successful, the CID will incur costs relative to holding the recall election/director election. Again, most CIDs are not in a financial position to incur these additional costs.

Option #3 – Perform all acts necessary to hold a recall election and concurrent director election.

The third, and final, option—to conduct the recall election and concurrent director election—is the only option available to the CID that minimizes the CID’s financial harm and liability exposure. It is therefore the preferred course of action in response to a petition to recall the Board.

It is important to note that recent changes to the California Civil Code governing CID elections has made it practically impossible for a CID to comply with the timing requirements contained in California Corporations Code section 7511(c) and those contained in California Civil Code section 5115. Nevertheless, California Civil Code section 5100(a)(1) makes it clear that the procedural requirements contained within the Davis-Stirling Common Interest Development Act (“Act”) control—“Notwithstanding any other law….” The CID must therefore comply with the procedural requirements contained in California Civil Code section 5115 notwithstanding the degree to which same deviates from those contained in California Corporations Code section 7511.

Other Option Available to the CID to Prevent Recall Petitions Immediately After a Director Election

The foregoing has addressed the ways in which a CID may respond to a recall petition immediately after the conclusion of a director election. It does not, however, address how a CID may prevent such petitions from being brought in the future. One way in which a CID may prevent such petitions from being brought in the future is to adopt rules governing recall elections. Although the Act does not directly address the extent to which a CID may restrict recall petitions, other bodies of law have. For example, in the California Elections Code, a person is precluded from bringing a recall petition against “an officer of a city, county, special district, school district, community college district, or county board of education” if one ore more of the specifically identified limitations apply (e.g., the officer “has not held office during [their] current term for more than 90 days”). A CID may adopt a similar limitation for director recalls.

California HOA lawyers Each recall petition is unique. Thus, while the foregoing provides general guidance based on the particular facts identified above, each CID must confer with its attorney to determine the appropriate response to a recall petition.

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

*Asked & Answered

hole_in_firewallAsked – Our HOA Board of Directors has become aware of a potential issue with the fire resistive construction in the walls between two condominium units. The Board is split on whether notice to the membership as a whole is warranted at this time, prior to the conclusion of the investigation, given that this potential issue affects a life safety system. Half of us feel that the issue is only technical in nature, while the other half believes that any potential issue should be communicated to the membership. We do not want to unnecessarily alarm the membership or incur thousands of dollars investigating the issue throughout the community if it is not significant, but at the same time we do not want to expose the Board or Association to a risk of liability.

AnsweredThe Board, as fiduciaries to the Association, is obligated to rely on subject matter experts in situations such as these. (Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783.) If the components in question fall within the scope of the Association’s repair responsibilities, the Association has a duty to retain experts to investigate the matter. Given the technical complexity of fire resistive construction systems, and the potential life safety implications, the Association should specifically ask their retained expert to evaluate and comment on whether membership notification of the issue is warranted at this time or whether further investigation is required. Often times, technical violations may exist that do not impair the overall performance of the system, but the Board should not rely on their own intuition or experience to make that determination. Such decisions can only be made after expert recommendations are provided and reviewed by the Board.

California HOA lawyers While a court will defer to a board’s discretion in its decision making, that deference will only apply if the board conducted a reasonable investigation and relied on the advice of experts. (Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 21 Cal.4th 249.)

-Blog post authored by TLG Attorney, Tim D. Klubnikin, Esq.

downloadRecall elections of individual Board members or of the entire Board are a source of great contention, divide and added expense for HOA’s. Prior to the passage of SB 323, which took effect January 1, 2020, recall petitions and elections were already complicated. To add to this complexity, since SB 323 became law, some of the Civil Code sections associated with HOA elections now conflict with those of the Corporations Code in the context of recall elections.

According to Corporations Code Sections 7510(e) and 7511(a), assuming at least five percent (5%) of the membership has signed a petition for same, an HOA has twenty (20) days to notice the membership of a special meeting of the membership to vote to recall the Directors and to elect new Directors to replace the recalled Directors if the recall is successful. Corporations Code Section 7511(c) requires that the special membership meeting to recall the Directors be set not less than thirty-five (35) or more than ninety (90) days after receipt of the recall petition.

Civil Code Section 5100(a)(1) states, “Notwithstanding any other law or provision of the governing documents, elections . . . legally requiring a vote, election and removal of directors . . . shall be held by secret ballot in accordance with the procedures set forth in this article.” This means that elections to remove/recall directors and to elect replacement Directors must comply with Civil Code Section 5100 et seq, which was amended via the passage of SB 323.

Notably, the required timeline for a recall election set forth in the Corporations Code does not match that of the Civil Code. Specifically, Civil Code Section 5115 proscribes a timeline of at least ninety (90) days to hold an election, assuming an Association’s Election Rules have already been amended to comply with SB 323, and which does not include any extra days for weekends or holidays. Therefore, noticing the membership for a recall election within ninety (90) days of the receipt of a recall petition as mandated by Corporations Code Section 7511 is now practicably impossible to satisfy in light of the new elongated Civil Code 5115 required timeline for elections (including recall elections). This is because notice cannot be sent to the membership until the Board and its counsel have reviewed and verified the petition to ensure it meets the requirements of the law and governing documents, which cannot reasonably occur on the same day a petition is received.

Thankfully, the Civil Code provides direction to Boards facing such a morass. Pursuant to Civil Code Section 5100(e), “(i)n the event of a conflict between this article and the provisions of the Nonprofit Mutual Benefit Corporation Law (Part 3(commencing with Section 7110) of Division 2 of Title 1 of the Corporations Code) relating to election [which includes Corp. Code Section 7511], the provisions of this article shall prevail.” This means that when there is a conflict between the Corporations Code and the Civil Code regarding mandated timelines and related notice deadlines for a recall election, Boards must follow the timelines proscribed in the Civil Code.

Although the Civil Code makes it clear that its provisions supersede those of the Corporations Code with regard to recall election timelines, other attorneys have taken a different and what we believe to be an erroneous approach to this conflict by advising HOA’s that the election to recall Directors take place before the election to replace recalled Directors to attempt to satisfy both the Corporations Code and the Civil Code. However, this approach is not advisable for several reasons.

First, Corporations Code Section 7220(b) makes it clear that the recall of a Director means said Director is no longer on the Board. Unless the Bylaws provide otherwise, there is no legal authority for a recalled Director to remain on a Board with any power or authority – even in a limited capacity – once the members have voted to recall or remove said Director. Accordingly, a recalled Director may not serve on the Board in the interim between their removal and the election of their successor because they have already been removed and no longer have any power or authority.

Second, Members may only petition the Board to schedule a special membership meeting, including one to recall Directors, for a lawful purpose pursuant to Corporations Code Section 7510(e). This means that if a petition seeks to partition a recall election from the election of replacement Directors if the recall is successful at a later date, the petition is not for a lawful purpose as Corporations Code Section 7210 and most likely the Association’s governing documents require HOA’s to have a Board of Directors. Recalling a Director without immediately electing their replacement would leave the HOA without a functioning Board of Directors as required by law.

Finally, petitioning members or Boards who allow the vote to recall Directors to proceed within the Corporations Code timeline of 35-90 days of receipt of the recall petition but allowing said recalled Directors to still serve on the Board with limited powers (without legal authority for same as discussed above) until their successors can later be elected under the longer Civil Code Section 5115 timeline expose their Association to legal liability. This is because if the recalled Directors who have no lawful authority are still meeting and making decisions on behalf of the HOA, such as entering into contractual relationships, imposing disciplinary action, etc. these decisions and acts made without proper authority are arguably void under the law. Furthermore, a recall election not conducted in strict accordance with Civil Code Section 5100 et seq. runs the risk of being challenged in court. Pursuant to SB 323, judges no longer have discretion in ruling upon such challenges as Civil Code Section 5145 now requires a judge to void any election not conducted in strict accordance with Civil Code Section 5100 et seq, which creates further legal exposure for an HOA attempting to bend the rules.

California HOA lawyers In summary, because of the complexities of HOA elections and especially those for the removal of Directors, HOA’s should contact their legal counsel as soon as a recall petition is received.

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

ResearchingThePost-COVIDGymExperienceWe have previously blogged about successfully re-opening the common area amenities during the COVID-19 pandemic. Homeowner Associations (HOAs) are tasked with various responsibilities, including the health and safety of their memberships.  California has made it clear that all businesses and facilities must follow the industry guidance to reduce the risk of COVID-19 before reopening.  Willfully disregarding the state government directives and subjecting the membership to COVID-19 exposure is antithetical to this purpose.  As such, it is possible for HOAs to expose themselves to substantial liability if they re-opened the common area facilities using only a member honor system to enforce the industry guidance to reduce risk of COVID-19.

California has a new blueprint (“Blueprint“) for reducing COVID-19 transmission in the state with revised criteria for loosening and tightening restrictions on activities. Every county in California is assigned to a tier based on its test positivity and adjusted case rate for tier assignment including metrics from the last three (3) weeks.  HOAs’ management should routinely check the restriction criteria that is respective to each HOA’s county.  For example, as of December 30, 2020, Orange County and San Diego are under a Regional Stay Home Order  meaning many non-essential indoor business operations are closed.  Pursuant to government directives, gyms and fitness centers can open outdoors only with modifications.  Indoor pools, hot tubs, saunas, and steam rooms must close. Also note that each county may impose further requirements that are stricter than the state government directive.

Understandably, HOAs have probably not accounted for a pandemic in their prior operating budget, so retaining extra personnel to enforce health guidelines would no doubt put a strain on already allocated financial resources.  However, in the interest of being safe, HOAs should follow the Blueprint and industry guidance policies, particularly when it comes to re-opening common area facilities.  It is quite difficult to rely solely on HOA members and their guests to conform with both California State and County guidelines regarding the re-opening of HOA common area facilities.  There are always a few outlying members unwilling to cooperate and keep clean the common areas/equipment after usage, thus leaving HOAs in a situation where HOAs may become liable.

California HOA lawyers As a reminder, HOAs and the Board of Directors have an obligation to keep common areas safely maintained to ensure the health and safety of their memberships.  As such, re-opening HOA common area facilities without a proper plan, protocols, and monitoring system puts the safety of an HOA’s membership in question and is antithetical to an HOA’s overall purpose, which may subject an HOA to liability.  HOA Boards should discuss the matter amongst themselves and reach out to their general counsel should the need arise. 

-Blog post authored by TLG Attorney, Vivian X. Tran, Esq.

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.

*Asked & Answered

temporary-outdoor-fence-privacy-ides-rental-panels-bamboo-backyard_outdoor-patio-and-backyardAsked – Our association has two homeowners that have requested the association’s intervention to assist with resolving a dispute that has arose from damage to a shared wall. Should the Board get involved? Does the Association have any responsibility to cover the cost to repair the shared wall?

Answered – As a general matter, the Association is not obligated to intervene in this neighbor-to-neighbor dispute and is not responsible for covering the cost of the damage to the shared wall (“Party Wall”).

California Civil Code § 4775 provides the general allocation of maintenance responsibilities between associations and individual homeowners as follows, “unless otherwise provided in the declaration of a common interest development, the association is responsible for repairing, replacing, and maintaining the common area.” (Civ. Code § 4775(a)(1). Emphasis added.) The code further provides that “[u]nless otherwise provided in the declaration of a common interest development, the owner of each separate interest is responsible for repairing, replacing, and maintaining that separate interest.” (Id. at (a)(2). Emphasis added.)

In this situation, the damaged Party Wall is located between two private lots, not on the Association common area. As such, absent any provision in the association’s governing documents to the contrary, the association has no obligation to repair the Party Wall.

This point is further clarified by California Civil Code § 841(a), which states, in pertinent part: “[a]djoining landowners shall share equally in the responsibility for maintaining the boundaries and monuments between them.” Which, necessarily, would include the damaged Party Wall. This maintenance obligation extends to “reasonable costs of construction…or necessary replacement of the fence.” (Civ. Code § 841(b)(1).)

There may be circumstances where the Board of Directors (“Board”) may sympathize with the homeowners and want to intervene (eg. the damage to the Party Wall was no fault of the homeowners). While this feeling is valid and shows the Board’s virtues, the Board should remember that they are fiduciaries of the Association and must act in the best interests of the association as a whole.

The Board lacks the authority to expend association funds to repair the damaged Party Wall. The association levy’s and collects assessments from its owners for various reasons including among other things, promoting its members’ welfare, improving and maintaining association property, and discharging association obligations under their governing documents. However, covering the cost of the Party Wall, which is a separate interest, would be outside the scope of the association’s authority.

Thus, the association has no obligation or authority to intervene with this dispute and make the repairs to the damaged Party Wall. That burden lies solely with the homeowners.

California HOA lawyers In addition to the above, prudent associations adopt neighbor-to-neighbor dispute policies to offset many disputes that can likely be resolved with effort between the homeowners.

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

AR-703289967-e1585596723226*Unpublished Opinion

Volunteer officers and directors of a common interest development (“HOA”) are required to make decisions which often have significant legal and financial implications for the HOA and its membership. Because they are unpaid volunteers, officers and directors are afforded certain protections against personal liability similar to those afforded to directors and officers of other types of nonprofit corporations. Those protections are necessary in order to secure members willing to serve a HOA’s board:

The Legislature finds and declares that the services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California. The willingness of volunteers to offer their services has been deterred by the perception that their personal assets are at risk for these activities…It is the public policy of this state to provide incentive and protection to the individuals who perform these important functions.

(Corp. Code § 5047.5(a).)

One of the liability protections afforded to a corporation’s directors include a legal doctrine known as the “Business Judgment Rule,” or, in the context of HOAs, the “Rule of Judicial Deference.” (See Lamden v. La Jolla Shores Clubdominium HOA (1999) 21 Cal.4th 249.)  The Rule of Judicial Deference generally requires courts to defer to maintenance decisions made by HOA boards even if a reasonable person would have acted differently in the same situation:

Where a…board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority…to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.

(Id. at p. 253.) Such deference is premised upon “the relative competence, over that of courts, possessed by owners and directors of [HOAs] to make the detailed and peculiar economic decisions necessary in the maintenance of those developments.” (Id. at pp. 270-71.)

Accordingly, so long as the board acts in accordance with its duties, in good faith, and in a manner it believes to be in the best interests of the HOA and its members, its decision will generally be upheld. (Id., at p. 265; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal. App. 4th 965, 979.) Courts commonly afford boards with the presumption in favor of their actions being taken in good faith. (Beehan v. Lido Isle Community Assn. (1977) 70 Cal. App. 3d 858, 865 (“Every presumption is in favor of the good faith of the directors. Interference with such discretion is not warranted in doubtful cases.”).)

Nevertheless, the Rule of Judicial Deference does not necessarily extend to every action (or decision not to act) that the board may take. Notably, the rule set forth in Lamden was tied solely to board decisions concerning “ordinary maintenance.” (See Lamden, 21 Cal.4th at p. 260 (“The precise question presented…is whether we should…adopt for California courts a…rule-of judicial deference…that would apply…to…ordinary maintenance decisions entrusted to the discretion of their [HOAs’] boards of directors.”).) It does not create comprehensive protection for every decision and action of a HOA; rather, such “deference applies only when a homeowner sues a [HOA] over a maintenance decision that meets the enumerated criteria.” (Affan v. Portofino Cove HOA (2010) 189 Cal.App.4th 930, 940.)

Despite the Court’s reference to the “narrow scope of the Lamden rule,” the Rule of Judicial Deference is still being expanded despite the Affan holding. For example, in the recent unpublished case of Jongerius v. Sun Lakes Country Club Homeowners Ass’n (2019) Cal. App. Unpub. LEXIS 7316 (“Jongerius”), the California Court of Appeal touched on the Affan holding, as well as other holdings applying the Lamden rule, when rejecting the homeowners’ argument that the scope of the Lamden rule is limited to decisions that relate to damaged common area and not to private property.

In Jongerius, the HOA became aware of a soil subsidence issue impacting several lots abutting a common area slope and damaging the common area wall separating the two. In response, the HOA retained a civil engineer (“First Expert”) “‘to investigate and provide independent expert analysis regarding the nature, extent, and cause of the slope subsidence occurring adjacent to the lots’ owned by plaintiffs.” (Id. at p. *4.) Between 2006 and 2010, the First Expert found no evidence of slope instability but noted “very small” movement as a result of soil settling. The Expert indicated that “[a] perfect repair procedure would be to install a caisson-supported wall and grade beam system at the top of slope,” but that such a repair would not be reasonable under the circumstances given the costly and disruptive nature of the repair. (Id. at p. *5 (internal quotations omitted).)

In 2011, and after settling with the developer on the soil subsidence issue, the HOA hired a second engineer (“Second Expert”) “to conduct another site inspection and to prepare repair recommendations that would alleviate the damage the slope creep was causing to the rear common wall running along the subject slope.”  The Second Expert disagreed with the First Expert in terms of repairs, opining “that the most appropriate means of repair for the walls is to fill the separations with non-shrinking grout, cosmetically patch, texture coat, and paint the walls every few years.” (Id. at p. *6 (internal quotations omitted).) In light of the $4 million cost of installing a caisson-supported wall, the Board unanimously approved the Second Expert’s recommendation of frequent cosmetic repairs.

Sometime thereafter, certain homeowners abutting the common area slope brought a lawsuit against the HOA claiming that the HOA had negligently maintained the common area slope pursuant to the HOA’s CC&Rs which had resulted in damage to the homeowners’ property. (Id. at p. *9.) The trial court granted the HOA’s motion for summary judgment, finding that the Rule of Judicial Deference barred the homeowners’ claims. (Id.) The Court of Appeal affirmed.

Homeowners’ contended that the Lamden case limited the extent to which the Rule of Judicial Deference applied in maintenance-decision cases. In particular, the homeowners argued that the Lamden rule “only applies in narrow circumstances involving damage to common areas, not to private properties” owned by other parties. (Id. at p. 15) In other words, “judicial deference is only given to HOA decisions that affect common areas, not private properties owned by third parties.” (Id.) The Court rejected this argument, concluding that “the Lamden court never distinguished personal or separate property from common area property.” (Id.) Indeed, in Lamden itself, the court applied the Rule of Judicial Deference notwithstanding the plaintiff’s alleged diminution in property values as a result of the HOA’s maintenance decision. (Id. at p. 16.) Moreover, in Affan, the court refused to apply the Rule of Judicial Deference not because of the distinction between common area and private property, but rather because of the HOA’s complete and utter failure to remedy a known common area maintenance issue. (Id.)

Accordingly, the Jongerius court concluded that the Rule of Judicial Deference applies to common area maintenance decisions notwithstanding the fact that those decisions may negatively impact the private property of others. Nevertheless, in order for the Lamden rule to apply the HOA must demonstrate that its decision was made upon reasonable investigation, in good faith and in the best interest of the HOA and its members. In Jongerius, the HOA met that burden.

California HOA lawyers This case is important because it highlights the fact that the Rule of Judicial Deference may apply in situations where common area maintenance decisions cause damage to property owned by third parties. However, the HOA must still demonstrate that the decision was made upon reasonable investigation, and in good faith and in the best interest of the HOA. Therefore, it is important for HOAs to get experts involved when considering issues impacting common area maintenance.

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

covid-19-1330pxOver the last few business days, our firm has received several calls regarding the Coronavirus (COVID – 19).  We understand the obstacles created by COVID – 19 because successful association governance depends upon engaged community involvement and personal interaction.

The purpose of this blog post is to provide a brief overview of our response to some of the common questions we have received.  It is based upon information which is currently available as of March 17, 2020.  The recommendations set forth herein are subject to change based upon governmental mandates.

Continuance of Necessary Business Operations:

Community associations, as non-profit corporations, should continue to perform essential business operations (i.e. collect Member assessments and pay Association bills) during this epidemic.  As of the time of this drafting (3/17/20), President Trump released new guidelines to slow the spread of COVID – 19 by advising the public to avoid groups of more than ten (10) individuals, among other safeguards.  Governor Newsome recommends that restaurants eliminate dine-in options and the closure of movie theaters and health clubs.  Medical professionals have uniformly taken the position that social distancing can minimize virus transmission.  In view of those protections, boards, in consultation with management and legal counsel, should consider the temporary closure of community-based events and functions, particularly in situations where residents constitute a high-risk demographic (i.e. age-restricted communities).

Board Meetings:

Board meeting procedure is regulated by an association’s governing documents and the Civil Code.  An association’s by-laws will set forth the frequency of board meetings.  Boards should consider postponing non-essential general session board meetings, or in the alternative, conducting essential association business in executive session only via teleconference as permitted by California law.  Boards may conduct general session and executive session board meetings via teleconference upon proper notice which identifies at least one physical location so that Members of the association may attend (Civil Code Section 4090 (b)).  At least one director or a person designated by the board shall be present at that location (Civil Code Section 4090 (b)).

To the extent possible, efforts should be made to protect Member rights, such as the right to attend board meetings and participate in homeowner’s forums.  How do we balance those rights with current social distancing recommendations? There might be a viable path under the Open Meeting Act.  Members possess the legal right to attend general session board meetings and shall be entitled to attend teleconferenced board meetings (Civil Code Section 4925). An argument could be made that Members may attend general session board meetings via teleconferencing means if such board meeting was previously noticed as a teleconference board meeting and the procedural requirements are satisfied as referenced above.  Discuss with legal counsel whether the Open Meeting Act could be interpreted to allow Member attendance (via audio and/or video means) at teleconferenced board meetings instead of physical presence at the meeting location.

We recommend that boards consult with legal counsel to discuss teleconferenced general session board meeting procedure before deciding to hold open meetings without members and then issuing minutes thereafter.  It is unclear how a superior court judge, in the event of a later Member challenge, might evaluate the handling of board meeting procedure during this current state of emergency.  A possible judicial response might be to review how the association attempted to substantially comply with the law using the governance tools that are presently available through the Open Meeting Act.

Member Notice:

Medical professionals state that individuals respond to crisis and stress in different ways; it is very likely that some may be scared while others may not be.  Residents may look to the association and management for guidance and direction.  For that reason, transparency is desirable.  Boards should work with their management partners and legal counsel to develop a policy statement which identifies how your community intends to respond to COVID – 19 with respect to association meetings and community affairs.  In the event of common area closure or facility limitations, notices should be posted which explain the board’s reasoning in that regard.  Association residents should be directed to governmental agencies (e.g. CDC, California Department of Public Health, and county health agencies) for more information.

On March 12, 2020, California Governor Gavin Newsom issued Executive Order N-25-20 (“Order”) which modified how legislative bodies may conduct public meetings via teleconference under the Brown Act.  That Order does not apply to private association meetings which are governed by the Open Meeting Act and we are not aware of emergency legislation that might govern how association meetings are expected to be handled during this health crisis.  Although not applicable, the spirit of the Order’s final provision should be considered as we think about association governance during this time; namely, the Order concludes by stating that, “all state and local bodies are urged to use sound discretion and to make reasonable efforts to adhere as reasonably as possible to the provisions of the … Brown Act, and other applicable local laws regulating the conduct of public meetings, in order to maximize transparency and provide access to their meetings.”

California HOA lawyers It is critically important that boards work closely with their management partners and legal counsel to develop practical solutions regarding Board governance which, to the extent possible, complies with the Open Meeting Act while protecting Member safety.

-Blog post authored by TLG Attorney, Kumar S. Raja, Esq.

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