Boards of Directors

AB 2912: New Protections Against the Misuse of HOA Funds

Published on: November 27, 2018 | by Steven J. Tinnelly, Esq.

*New Library Article!

electronic-funds-transfer-help-e1542145539349 Assembly Bill 2912 (“AB 2912”) was recently enacted by the California Legislature. Its changes to the law, which take effect January 1, 2019, are intended “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.” To that end, AB 2912 (a) significantly increases the financial review requirements of HOA boards of directors, (b) limits the ability for automatic transfer of HOA funds without board approval, and (c) imposes a requirement for the HOA to purchase and maintain a fidelity bond.

In the wake of AB 2912’s passage, questions and concerns have surfaced as to how HOAs and management companies may need to adjust their current operational procedures to comply with the new state of the law. Our HOA attorneys have authored a new article to address some of those questions and to clarify some of AB 2912’s key components.

The article, entitled “AB 2912: New Protections Against the Misuse of HOA Funds,” is available for download from our firm’s library. You can access the article by clicking here.

Should an Association Respond to Unofficial Publications?

Published on: August 28, 2018 | by Steven J. Tinnelly, Esq.

*Unpublished Opinion

With increasing frequency, homeowners associations are confronted with members publishing content related to their association and its operations, whether on Facebook, blog posts, or other various online forums. Sometimes these publications are critical of the association board of directors, misrepresent important information and facts, or fraudulently purport to be official association publications. The various potential issues associated with member publications are seemingly endless, but California courts periodically provide clarity regarding issues that can arise in the context of member/association publications. The recent unpublished opinion of Kulick v. Leisure Village Association (2018) arose out of the publication of such member content and provides insight into how courts view and address some of these issues.

The Kulick case involved two separate lawsuits between a homeowner (“Kulick”) and his homeowner’s association (“Association”), the Association’s board of directors (“Board”), and the Association’s attorneys. Kulick, a long-time resident with a history of conflict and grievances against the Association, anonymously published and circulated newsletters (“Newsletters”) within the community in violation of the Association’s rules and regulations prohibiting anonymous publications. Kulick’s anonymous Newsletters were frequently critical of the Association Board.

The Association successfully filed suit against Kulick for intentional interference with Association insurance coverage. In response to the Association’s lawsuit, Kulick levied accusations against the Board in one of his anonymous Newsletters. In defense of Kulick’s claims, the Association (through counsel) prepared and circulated a letter (“Letter”) to each community member addressing Kulick’s specific allegations by denying Board misconduct and inviting the membership to view court filings in the pending matter. The Letter described Kulick’s most recent missive as a “reckless communication” containing “unfounded, inaccurate, and spiteful allegations” against the Association, Board, and the Association’s attorneys. It also contained details regarding the then-pending matter and the Association’s success in their preliminary injunction against Kulick. After the Letter was circulated, Kulick brought a lawsuit against the Association for defamation arising out of the Letter to the membership, among other causes of action.

The trial court dismissed Kulick’s case after the Association brought an Anti-SLAPP motion against the defamation claim (“SLAPP” stands for Strategic Lawsuits Against Public Participation; such motions are designed to protect defendants who have been sued for acts in furtherance of a constitutionally protected right of free speech or petition). On appeal, the court found that the Letter constituted “protected activity” as a public writing (i.e. circulated to all members throughout the community) in connection with an issue of public interest – the ongoing controversy of the then-pending lawsuit between the Association and Kulick. Additionally, the court found that Kulick could not demonstrate a likelihood of success on the merits because “expressions of opinion that do not include or imply false factual assertions do not constitute actionable defamation,” among other reasons. For these reasons, the appellate court upheld the trial court’s ruling against Kulick.

While the Kulick case did not ultimately address the anonymous nature of Kulick’s publications or the validity of the Association rule prohibiting them, Kulick raises important issues for associations to consider when confronted with homeowner publications, or association responses to them. While it is unclear to what extent associations can restrict member publications, such as the regulation of anonymous publications, the court in Kulick signaled an association’s ability to address specific member allegations in the public forum of the community. However, when addressing such claims, associations should be mindful of the content of these responses as certain communications are not permissible (e.g. false assertions of fact, etc.). Conversely, an association has rights against defamation published by its members and should address any member publications that defame the association, its board of directors, managing agent, or employees.

Additionally, associations should be vigilant regarding member publications that purport to be official association publications, or publications that are circulated that contain patently false information. Such publications can cause significant disruption in an association’s affairs if allowed to exist and perpetuate. Ultimately, while the line between permissible and actionable content is by no means clear and varies case by case, associations should be alert for member publications that contain clearly false assertions of fact or publications that purport to be official association communications. If you have concerns regarding member publications or appropriate association responses to them, association counsel should be contacted to review the material and discuss potential remedies to the extent they are available.

Although Kulick is an unpublished opinion, it provides an indication of how a future court may rule in a similar situation. When confronted with member publications, homeowners associations should consider whether the published content violates any association rules and regulations, whether it contains false assertions of fact, or whether the content purports to be or could be reasonably construed as an official association publication intended to mislead the recipients and/or members.

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

Debunking the Myths of Volunteer Board Service

Published on: August 7, 2018 | by Steven J. Tinnelly, Esq.

bustingthemyths1-1-300x197 Congratulations! You’ve just been elected to your Board of Directors – now what? Or maybe you’ve been serving as a volunteer director for some time and you just aren’t sure which way is up. If you have been dazed and confused but still have a passionate heart to do the right thing in the best interest of your community, then there may be some myths that need to be debunked. Navigating through conflict, financial tough spots, working with your service providers, noncompliance issues, homeowner requests, day-to-day operations, and strategic planning can be overwhelming. Changing the way you do business can take you from volunteer Board member to community leader.

First and foremost, association directors must recognize that they have the same fiduciary duties as boards of large corporations. Each director has a duty of loyalty to the association and its members. He or she must act in the best of the association, accepting that a decision of a majority of a quorum of the board is a decision of the whole board. Volunteer directors are shielded from personal liability, provided they have acted in accordance with their fiduciary duties.

Board members must also act in accordance with the “business judgment rule.” They must act in good faith and in the best interest of the association; not according to self-interest or the interests of a particular group within the community. They must act only after reasonable inquiry, consulting with experts when it is prudent to do. And, they must act as an ordinarily prudent person in a like position would do, minimizing risks where they can be reasonably avoided. Keeping these two criteria in mind, let’s debunk a few myths of volunteer board service.

Sticks and Stones

Published on: June 6, 2018 | by Steven J. Tinnelly, Esq.

hostile-work-environment As HOA industry professionals, there are many positive aspects to our occupation. We work with a diverse group of people, take fulfillment from helping volunteer boards, and are happy when we solve problems through creativity. Unfortunately, there are situations that can become difficult.

Most association managers (“Manager”) have had some experience dealing with abusive homeowners and demanding board members (“Hostile Actor”). Typically, the Hostile Actor exhibits unrelenting behavior that becomes obnoxious despite Management’s best efforts.

The purpose of this article is to provide Managers with a brief primer as you experience hostility in the moment – via email correspondence, telephone calls, or direct confrontations.

When you encounter hostile situations, it is important to remember that your Management Company was hired to serve as the managing agent for the Association. Your primary responsibility is to implement the board’s directives and to serve as a communications liaison between the board and the residents. For the most part, substantive decisions are made by the board at monthly board meetings. Recognizing that legal relationship can assist the Manager when confronted with a threatening email or any other form of communication. Below is a sample response to consider when responding to a Hostile Actor:

“Thank you for your email. The board values resident communication relating to Association business. I understand your concerns and will forward your communication to the board for review at the next board meeting.

A phone call is usually the next step if the Hostile Actor is not satisfied with Management’s return correspondence. You should be able to tell where the call is headed based upon his or her initial tone and word choice. Hostile situations may be diffused or avoided altogether by giving the caller a chance to be heard; the Manager can use the call for good as an opportunity to further explain why it would be inappropriate and unfair if Management were to respond at that time.

You do not deserve to be the subject of personal attacks. Phone calls that lapse into volatile language should be ended as soon as possible by stating that all future communication must be sent in writing for board review. After the call concludes, it is advisable to send an email to the Hostile Actor which politely confirms your prior statement about future communication. If possible, the Manager should prepare an internal memo which documents what was said with as much detail as possible. The memo can be used to notify other Management employees regarding the Hostile Actor’s prior phone call and for evidence preservation purposes. Preserving inflammatory communication can help general counsel with later drafting cease and desist correspondence and, if necessary, filing a temporary restraining order if abusive behaviors later escalate.

With limited exception, there is no need for in-person meetings between Managers and Hostile Actors who have demonstrated a prior pattern of disruptive conduct. In general, Hostile Actors do not show up at Management’s business office unless they are angry. For that reason, direct confrontations, which are rarely productive, are not recommended because of the potential for further abuse. Management’s receptionist, if available, should screen the reason for the visit and then direct the Hostile Actor to forward his or her concerns to the board in writing. If a Manager interacts with a Hostile Actor, then all meetings should be held in the open presence of at least one (1) other Management professional so that conversations can be witnessed. One-on-one meetings in a private office are discouraged.

What happens when the Hostile Actor is a board member? Management’s executive team, if available, should be contacted for assistance to navigate the delicate client relationship. The board member should be reminded that your ability to support the Association depends upon establishing a professional working relationship.

The appearance of the Hostile Actor at board meetings is not uncommon. The Manager can reduce the possibility of hostile meeting environments by being proactive. Distributing policy statements for board meeting conduct and requiring the completion of homeowner speaker cards are effective ways to create a healthy work space. Those documents can state that homeowner forum will be time limited and interruptions will not be tolerated, among other things. Unruly board members may be tempered by emphasizing the importance of only discussing agenda items and underscoring the negative consequences to the Association by engaging in harmful dialogue.

The Hostile Actor is a frequent character in the business of managing community associations. Disruptive situations should be identified and handled swiftly by the board and Management on a case by case basis through a collaborative process. The Manager should consider contacting ‘legal’ if abusive communication intensifies. General counsel can then offer potential solutions for board review such as sending cease and desist correspondence, initiating the Internal Dispute Resolution process, or seeking judicial relief.

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

The National Labor Relations Board Had a Change of Heart on Joint-Employer Liability

Published on: January 23, 2018 | by Steven J. Tinnelly, Esq.

notboss63 Previously, we wrote on a decision published by the National Labor Relations Board (“NLRB”) wherein the NLRB concluded that, where a contracting party has reserved the authority to exercise control over the employees of another, said contracting party will be found to be the “joint employer” of the other entity’s employees. In the case of Browning-Ferris Industries of California, Inc. (2015) NLRB No. 672 (“BFI”), BFI retained the services of Leadpoint Business Services (“LBS”) to provide staff to one of BFI’s recycling facilities. Although the contract between BFI and LBS recognized that the personnel staffed by LBS were the employees of LBS, BFI retained some control over the employees. As such, the NLRB concluded that as long as a company retains (e.g., through the execution of a contract) the authority to control the employees of another, said company will be given joint-employer status. (Id. at p. *2.)

The BFI decision caused quite a stir in the realm of common interest developments. As discussed in our prior post, many associations retain a community management firm to facilitate the duties of the association (e.g., solicit bids for common area maintenance and repair). And while the community managers were historically viewed as the employees of the management firm, the BFI case raised some questions with respect to the nature of the relationship between the employees of a management firm and the association.

Nevertheless, on December 14, 2017, the NLRB did an about-face reversing its decision in the BFI case. In Hy-Brand Industrial Contractors, Ltd. (“Hy-Brand”) the NLRB held that the BFI standard was “a distortion of common law as interpreted by the Board and the courts…[wa]s contrary to the [National Labor Relations] Act…is ill-advised as a matter of policy, and its application would prevent the [NLRB] from…foster[ing] stability in labor-management relations.” ((2017) 365 NLRB No. 156, *2.) Accordingly, the NLRB concluded that a joint-employment relationship will be found where there is evidence demonstrating that an entity has “exercised joint control over essential employment terms (rather than merely having “reserved” the right to exercise control).” (Id. at p. *5 (emphasis original).) Said control must be “direct and immediate,” as opposed to “indirect,” and must be more than control which is “limited and routine.” (Id.)

Although the BFI case has been abrogated restoring the prior position of the NLRB, associations and management companies must continue to exercise caution when hiring vendors to perform services for the association to prevent a finding of a joint-employment relationship. In Heiman v. Workers’ Compensation Appeals Board, the Court of Appeal concluded that the community manager (and by extension, the association) was the joint-employer of an employee of an unlicensed and uninsured contractor. ((2007) 149 Cal. App. 4th 724.) Under California law, one of the legal consequences for hiring an unlicensed contractor is that the person who hired the unlicensed contractor may be considered an “employer” for tort-liability purposes. (Id. at p. 735.) Since the community manager hired an unlicensed contractor, it was found to be the joint-employer of the injured worker. And, because of the agency relationship between the management company and the association, the association was found liable. (Id. at p. 744.)

In sum, despite the shift in position, associations must continue to insulate itself from a finding of joint-employer status by ensuring that it retains only licensed and insured vendors, and adequately sets forth the scope of work and the level of care and skill required to achieve the desired result within its contract with the vendor. Moreover, the contract must include a provision requiring the contractor to indemnify and hold the association harmless in the event a labor dispute arises between the contractor and its employees.

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

AB 1412 Signed: Clarification of Two (2) Existing Code Sections (Member Notification and Director/Officer Liability)

Published on: September 26, 2017 | by Steven J. Tinnelly, Esq.

Director-Liability On September 25, 2017, Governor Brown signed AB 1412 (effective January 1, 2018) which seeks to clarify Civil Code Section 4041 (Annual Notice of Owner Contact Information) and Civil Code Section 5800 (Limitation of Director and Officer Liability).

Under current law, Civil Code Section 4041 requires the Association to solicit, on an annual basis, mailing addresses from the Members for purposes of providing notice. Members are required to state the primary and secondary addresses to which notices from the Association are to be delivered, among other things. If no such notice is provided, that Section 4041 provides that the default mailing address for purposes of delivery shall be the Member’s property address within the Association.

The existing version of Civil Code Section 4041 potentially inconveniences non-resident Members because they must annually notify the Association of their current mailing address. If they fail to do so, Management is then legally obligated to change the Members’ mailing address back to the Members’ Association address.

AB 1412 removes those administrative burdens by stating that the default mailing address shall be the last address provided in writing by the Member to the Association, if any. Under that circumstance, the Association no longer needs to annually update its Member address records if the Members forget to supply their existing mailing address to the Association.

Civil Code Section 5800 provides liability protections to volunteer Directors and Officers if certain conditions are satisfied (i.e. the act/omission was performed in good faith and within the Director/Officer’s Association duties, etc.). Current law provides that such protections are only available to Directors/Officers in common interest developments that are exclusively residential. The protections previously offered by Section 5800 were unavailable to volunteer Directors/Officers in mixed use settings, such as common interest developments with residential and commercial units.

In view of the growing number of common interests developments throughout the state, the California legislature recognized that Section 5800 did not provide liability protection to Directors/Officers in mixed use common interest developments.

As such, AB 1412 seeks to expand the breadth of Civil Code Section 5800 because it now generally applies to volunteer Directors/Officers in mixed use settings. Such protection is limited to those Directors/Officers who are tenants of a residential separate interest or who own no more than two (2) residential separate interests.

AB 1412 will save time and money because the Association is no longer burdened with the duty to update Member address information if a Member fails to provide Management with his or her mailing address.

Mixed use common interest developments may experience increased Board participation by volunteer Directors/Officers because liability protections are now available under Civil Code Section 5800.

AB 1412 does not address whether volunteer commercial unit owners or Members who own three (3) or more residential units are immune from liability under the same liability protections. A review of the legislative history for AB 1412, coupled with general principles of statutory construction, suggests that those individuals may be excluded in that regard.

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

Business Judgment Rule Doesn’t Apply When the Board Acts Outside its Authority

Published on: June 14, 2017 | by Steven J. Tinnelly, Esq.

*Unpublished Case

ISSUE:

Is an HOA Board of Directors (“Board”) entitled to protection under the Business Judgment Rule (“BJR”) when it applies an unambiguous view restriction contained in the governing documents in a manner other than written?

RULE:

No. In Lingenbrink v. Del Rayo Estates Homeowners Association, 2017 WL 1075062 (“Lingenbrink”), the Court of Appeal concluded the BJR only applies to matters that are within an HOA Board’s discretion. A Board does not have the discretion to interpret or re-write a restriction where the meaning of the restriction is perfectly clear.

ANALYSIS:

The HOA consists of eighteen (18) “high end” homes in Rancho Santa Fe built on 21 lots, each with sweeping views of the Pacific Ocean. The CC&Rs contain very specific language that protects each Lot’s view as follows:

“No tree, hedges or other plant shall be so located or allowed to reach a size or height which will interfere with the view from any Lot and, in the event such trees, hedges or other plant materials do reach a height which interferes with the view from another Lot, then the Owner thereof shall cause such tree(s), hedge(s) or other plant material[(]s) to be trimmed or removed as necessary.”

Business Judgment Rule Does Not Protect the Willfully Ignorant

Published on: August 17, 2016 | by Steven J. Tinnelly, Esq.

*New Case Law Business Judgment Rule HOA

Volunteer homeowners association (“HOA”) directors are fiduciaries who are held to high standards of conduct when making decisions or taking actions on behalf of the communities they represent. Sometimes those decisions, which may seem reasonable at the time, ultimately lead to problems for the HOA or its members. If volunteer HOA directors were made personally liable for the consequences of their erroneous decisions, it would be virtually impossible for any HOA to recruit individuals to serve on its board. For this reason, HOA directors are afforded several liability protections under California law. One of those protections is a legal doctrine known as the “Business Judgment Rule.”

The Business Judgment Rule generally shields directors from personal liability that may result from their erroneous decisions, provided that the decision was made (1) with care, (2) in good faith, and (3) was based upon what the director believed to be in the best interest of the HOA. Making a decision “with care” generally requires that directors exercise reasonable diligence to investigate the issues surrounding the decision so that they are able to act on an informed basis.

But how broad are the protections of the Business Judgment Rule? Does it automatically shield a director who chooses to remain willfully ignorant as to the issues surrounding her actions or the scope of her authority? According to the Court of Appeal in the recent case of Palm Springs Villas II Homeowners Association v. Parth (2016) 248 Cal.App.4th 268, that answer appears to be no… Continue Reading ›

Associations Could Be Held Liable for the Employees of Independent Contractors

Published on: June 22, 2016 | by Steven J. Tinnelly, Esq.

Labor-Unions-Preventive-Practices-1024x683 On August 27, 2015, the National Labor Relations Board (“NLRB”) published its decision in the Browning-Ferris Industries of California, Inc. case (“BFI Case”). In that case, Browning-Ferris Industries of California, Inc. (“BFI”) retained the services of Leadpoint Business Services (“LBS”) to provide staff to one of BFI’s recycling facilities. The contract between BFI and LBS recognized, and the parties understood, that the personnel staffed by LBS were the employees of LBS. Nevertheless, given the fact that the contract granted BFI with some control over the employees of LBS, the NLRB concluded that BFI was a joint-employer of LBS thereby obligating BFI to comply with federal labor laws.

In adopting a new legal standard for determining joint-employer status, the NLRB emphasized that such a determination should not be based solely on actual control over the employees of another, but the “existence, extent, and object of the putative joint employer’s control.” (Browning-Ferris Industries of California, Inc. (2015) 2015 NLRB No. 672, *12 (Emphasis added).) Otherwise, employers would be able to insulate themselves from their responsibility to comply with federal labor laws. (Id. at p. *21) Accordingly, as long as a company retains (e.g., through the execution of a contract) the authority to control the employees of another, said company shall be given joint employer status. (Id. at p. *2.) This is true even if control is exercised indirectly (e.g., through an intermediary). (Id.)

Many associations retain a community management firm for the purpose of executing the duties of the association. These community management firms in turn employ community managers and support staff to manage these associations. While historically recognized as the employee of the community management firm (and an independent contractor of the association), the BFI Case raises some questions with respect to the nature of the relationship between the employees of a community management firm and the association. Accordingly, associations must be cognizant that a Court may find that it is a joint employer of the community manager (and support staff), notwithstanding the fact that it exercises no direct and immediate control over said manager.

Similarly, associations and management companies must take care when hiring maintenance and service providers for the community. When managers, committee members, or board members are conducting job walks with a contractor’s employee, reviewing specifications, or receiving invoices, the management company and the association may become joint employers. In Heiman v. Worker’s Compensation Appeals Board, Cal: Court of Appeal, 2nd Appellate Dist., 3rd Div. 2007 (“Heiman”), a community association manager hired an unlicensed and uninsured contractor on behalf of the association to install rain gutters on the condominium buildings. An employee of the contractor was seriously injured on the first day of the project and sued the contractor, management company, and association for workers’ compensation. The Court held that the contractor, the association, and the management company were all joint employers because the contractor hired the injured employee, and the management company, as agent of the association, hired the contractor. The BFI Case seems to affirm this decision.

In order to insulate the association from a possible finding of joint-employer status, the association should ensure that its contract with independent contractors, requires all proper licenses and insurance, adequately sets forth the desired results, and sets forth the level of care and skill to be used in accomplishing the desired results. (See Id. at p. 12 (“mere ‘service under an agreement to accomplish results or to use care and skill in accomplishing results’ is not evidence of an employment, or joint-employment relationship”).) The agreement should also include a provision that requires the contractor to indemnify and hold the association harmless in the event a labor dispute arises.

Blog post authored by TLG attorney, Matthew T. Plaxton.

Expanded Scope of ‘Judicial Deference’ – Authority to Impose Short-term Renter Fees

Published on: April 13, 2015 | by Steven J. Tinnelly, Esq.

*New Case Law

In the landmark case of Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249 (“Lamden“), the California Supreme Court established what is known as the “Rule of Judicial Deference” or “Lamden Rule” that, in sum, requires courts to defer to decisions made by a HOA’s Board of Directors regarding “ordinary maintenance:”

“…We adopt today for California courts a rule of judicial deference to community association board decisionmaking that applies, regardless of an association’s corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations’ boards of directors.” (Lamden, at 253.)

However, in a recently published opinion, the Court of Appeals expanded the scope of the Lamden Rule to include additional decisions made by a HOA’s Board, such as those to adopt rules and impose fees on members relating to short-term renters…