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DIRECTORS ON
FINANCE COMMITTEE
QUESTION: We have a five member board. We have a six person finance committee.
Four of the finance committee members are also board members. Does that
present a conflict of interest?
ANSWER: It does not present a conflict of interest but it does create an Open Meeting Act issue. As provided for in Civil Code §1363.05(j), a board meeting:
includes
any congregation of a majority of the members of the board at the same
time and place to hear, discuss, or deliberate upon any item of business
scheduled to be heard by the board, except those matters that may be
discussed in executive session.
Any
budget or finance matters discussed by the Committee will at some point
be presented to the board for action. Accordingly, your Finance
Committee meetings qualify as board meetings and need four-days notice
to the membership plus the posting of an agenda.
MAINTENANCE DUTIES
 QUESTION: If
a new set of CC&Rs transfers maintenance responsibility and repair
costs from the association to the owners, would it be legal?
ANSWER:
Yes, it would be legal. Maintenance duties do not automatically follow
ownership and can be reassigned by the membership via the governing
documents.
Condominiums. In condominiums, members own air
space plus an undivided percentage interest in the common areas. Even
though all plumbing and wiring in the walls are owned in common,
maintenance of these exclusive use common areas is typically assigned to unit owners. Civil Code §1364(a).
Planned Unit Developments.
In PUDs with townhouse construction, members own their individual
structures from the roof to the foundation and to the center of the
party wall separating it from the next unit. Nonetheless, maintenance of
the roof and exterior walls is typically assigned to the association
even though it has no ownership interest in the structure. Assigning
maintenance to the HOA should ensure timely and proper roof repairs (via
reserve funds) and uniform paint colors on exterior walls.
Benefits the Whole.
The California Supreme Court determined that "anyone who buys a unit in
a common interest development with knowledge of its owners
association's discretionary power accepts the risk that the power may be
used in a way that benefits the commonality but harms the individual."
The Court concluded that "the reasonableness . . . of a condominium use
restriction . . . is to be determined not by reference to facts that are
specific to the objecting homeowner, but by reference to the common
interest development as a whole." Nahrstedt v. Lakeside Village.
RECOMMENDATION:
HOAs can and should amend their documents to assign or reassign
maintenance duties in a manner that makes sense for their particular
development. Since most CC&Rs are vague when it comes to
maintenance, clearly defining those duties is one of the main benefits
of a restatement of an association's governing documents. Doing so
eliminates ambiguities that frequently lead to costly litigation.
RESERVE EXPENDITURES
 QUESTION: Does an expenditure from the reserve account require board approval?
ANSWER:
Yes. Reserve accounts are given significant protections by the
Davis-Stirling Act. Associations must set up bank accounts that are
separate and distinct from their managing agent's funds and separated into operating and reserve accounts.
Spending Restrictions.
Boards may not spend reserve funds for any purpose other than the
repair, restoration, replacement, or maintenance of, or litigation
involving the repair, restoration, replacement, or maintenance of, major
components that the association is obligated to repair, restore,
replace, or maintain. Civil Code §1365.5(c)(1).
Borrowing From Reserves. Boards are allowed to
borrow from reserves but are required to give notice of their intent to
borrow by listing it as an item in the meeting agenda. The meeting
notice must include the reason the reserve transfer is needed, some of
the options for
repayment, and whether a special assessment may be considered. If the
board authorizes the transfer, it must issue a written finding
recorded in the minutes explaining the reasons for the transfer, and
describing when and how the money will be repaid to the
reserves. Civil Code §1365.5(c)(2).
Two Signatures. Finally,
the signatures of at least two board members or one officer who is not
a member of the board plus a board member is required for the
withdrawal of moneys from the reserve
account. Civil Code §1365.5(b).
Summary. Transferring funds out of a reserve account is significant and requires board approval.
SMALL CLAIMS
COMMISSIONERS
 In
last week's newsletter I said I didn't think a person could refuse
being assigned to a commissioner. Thank you to everyone who sent emails
correcting this point. In addition to refusing a judge pro tem, parties
CAN refuse a commissioner.
Section 259(d) of the Code of Civil
Procedure provides that a commissioner has the power to "act as
temporary judge . . . on stipulation of the parties litigant." Where a
party fails or refuses to stipulate, actions of a commissioner are void,
as in excess of jurisdiction.Yetenekian v. Superior Court (1983)
140 Cal.App.3d 361. However, parties must object at their first
opportunity in small claims court or the objection may be deemed waived,
i.e., a stipulation may be implied by the parties’ conduct. Foosadas v. Superior Court (2005) 130 Cal.App.4th 649.
In addition, Code Civ. Proc. §170.6 allows replacement of any
judicial officer (pro tem, commissioner, or appointed judge) if timely
made.
FEEDBACK
Convicted Felon #1.
Thanks for noting that the convicted felon may actually be doing the
community a useful service. My experience is that willing
co-conspirator/mismanagers can cause more financial damage than a single
determined criminal. Also it seems that sex crimes have expanded to
include situations many would be surprised by, so the president-felon
may have been the victim of a particularly nasty divorce and pleaded
out? -Tony V.
Convicted Felon #2. I agree with you that boards should pass an ethics policy.
However, in the absence of an ethics policy, so far as I can tell a
board member need not recuse themselves from a discussion in which they
have an interest that varies from another board member when the board
has not adopted Robert's Rules (or similar) or an ethics/conflict of
interest policy, and if it's not in the governing documents. Am I
missing something? -Glenn P.
RESPONSE:
You're scaring me with your comments. It looks like you're saying that
directors are free to be unethical absent a duly adopted ethics policy.
If so, you are missing all the statutes and case law regarding fiduciary duties and self-dealing and the Business Judgment Rule and recusal. As many courts have already noted:
"It is well settled that
directors of nonprofit corporations are fiduciaries. . . . We note that the duty of undivided loyalty applies when the board of
directors of the association considers maintenance and repair contracts,
the operating budget, creation of reserve and operating accounts,
etc. Thus, . . . [directors] may not make decisions for the association
that benefit their own interests at the expense of the association and
its members." (Raven's Cove v. Knuppe)
Calif. Assn. of Realtors.
Kudos for your spot on response to CAR's Mr. Bjernefalt. From the
perspective of a long time HOA board member, it is my experience that
both good management and diligent boards' make reasonable
accommodations for members' hardship situations. CAR's position is
self-serving, purely and simply. - M.B.
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