The Problem of Suspended Homeowners Associations

California Homeowners Associations (“HOAs”) primarily exist as California Nonprofit Mutual Benefit Corporations. We have recently encountered some instances where smaller and/or self-managed HOAs have failed to file and pay their state corporate taxes and/or make certain corporate filings. The unfortunate result for these HOAs is that their California corporate status is being suspended.

The exercise of corporate powers, rights and privileges may be suspended both under California Revenue and Taxation Code Section 23301 for a HOA’s failure to pay taxes and under California Corporations Code Section 5008.6 for the HOA’s failure to file certain corporate statements. Once a HOA is suspended, so too are its powers, rights and privileges which are outlined in its governing documents.

These powers, rights and privileges are essential to the effective management and functioning of its community. Should directors or agents of a suspended HOA even attempt to carry out the powers of the HOA during the period of its suspension, California Revenue and Taxation Code Section 19719 may punish them “by a fine of not less than $250 and not exceeding $1,000, or by imprisonment not exceeding one year.”

The major problem with a suspended HOA is that, during the period of its suspension, the HOA finds itself in a legal coma from which it loses its rights to (1) bring and defend lawsuits, (2) enter into new contracts, and (3) enforce already existing contracts with contractors and vendors. The suspension could also inhibit the HOA’s ability to pursue delinquent assessments–a terrible scenario for a HOA already feeling the impact of a down economy.

Though a suspended HOA may be revived, the HOA subjects itself to significant legal and financial risk during the period of its suspension. HOA boards, managers and attorneys should understand the importance of maintaining the HOA’s corporate status at all times by ensuring that the appropriate taxes are paid and that the appropriate corporate statements are filed within the deadlines provided in the California Corporations Code.