COLLAPSE OF AN ASSOCIATION

QUESTION: Most of the owners in our 12-unit association stopped paying their dues. The board is not holding meetings and the management company terminated the account. The insurance has not be paid, the landscape, trash, etc. are not serviced as the vendors haven't been paid. At this point I think the intent is for all the owners to stop paying dues. Do you know what happens next?

ANSWER: What you describe is quite serious. Without insurance, all owners are personally exposed if someone is injured in your common areas. Each member could be sued and there will be no insurance to defend them or to pay any judgment. Each owner would need to pay out of pocket for an attorney and each could be liable for the entire judgment (joint and several liability). Your association has probably had its corporate status suspended, which means it cannot defend itself against lawsuits. Deferred maintenance will accumulate, leading to water damage and mold in the common areas (more potential litigation). In addition to owners being vulnerable to litigation, directors from the last board of record could be sued for breach of their fiduciary duties. Finally, the market values of your units will plummet to the point of being unsalable. Sellers must disclose to potential buyers the true state of your association's affairs, and who in their right mind would buy into your association?

Chapter 7 Bankruptcy. A Chapter 7 bankruptcy by your association would likely not be granted. Under this particular filing, a company goes out of business and a trustee is appointed to sell the company's assets to pay off debts. I don't see how that is possible for a homeowners association. Associations have no assets of any significance to sell, and the common areas cannot be sold. Moreover, an association cannot realistically go out of business--someone has to maintain the common areas and associations are created specifically for that purpose. Accordingly, I don't believe a Chapter 7 is possible.

Chapter 11 Bankruptcy. A Chapter 11 bankruptcy (reorganization) is possible if an association has debt and needs time to repay it. The federal bankruptcy court fashions a repayment plan which would likely include a special assessment against all owners to raise funds to pay those debts. It resolves debt issues but not your lack of management.

Court Appointed Custodian. Another option is for one or more members of the association to petition the state court to appoint a third party (a receiver or custodian) to manage the association as provided for in Code of Civil Procedure 564(b)(9). The receiver would have the power to run the association, including the power to assess the membership for all costs needed to pay for operations. The downside is that there are no restrictions on the size or frequency of assessments imposed by the receiver. The membership would have no say in what services were provided, what was repaired or when, or how much is paid for operations and repairs. All of that would be in the hands of the receiver. Moreover, the receiver would likely special assess the membership to pay for his/her services.

RECOMMENDATION: You should immediately seek legal counsel to determine your best course of action. A court-appointed receiver may be the quickest way to limit your exposure, especially since the association has no insurance. If the membership were smart, they would promptly restart association operations.

DELINQUENCIES

QUESTION: I was recently elected to an HOA board and found out that the board just wrote off $40,000 in bad debt. The association is financially in poor condition and not stable, with hardly any reserves. According to the financial statement I saw this past week, another $55,000 is now owed by other homeowners.

ANSWER: If the board is sitting on its hands and doing nothing to collect delinquent assessments, they are in breach of their fiduciary duties. I know it is uncomfortable for boards to initiate collection actions against their neighbors, many of whom are financially stressed through no fault of their own. However, failure to take action puts a greater financial burden on everyone else. The board needs to get dues-paying owners into those units as soon as possible.

NO SUPER-MAJORITY FOR
SPECIAL ASSESSMENTS

QUESTION: If our CC&Rs from 1963 say a 2/3 vote is needed for a special assessment, does the HOA follow the CC&Rs or can they go by the current law which requires a quorum of more than 50%?

ANSWER: The quorum for special assessments is set by statute. Regardless of anything to the contrary in your CC&Rs, special assessments are approved by a majority of the members casting votes once a quorum has been established. The Davis-Stirling Act defines a quorum to mean more than 50% of the owners. Civil Code 1366(b). As a result, the 2/3 provision in your CC&Rs is no longer valid.

FEEDBACK

Satellite Dishes. The installation of satellite dishes has proved to be a boost to my waterproofing business; installers just come out and slam them in willy nilly, causing leaks and lots of damage.

Dishes drilled into decks void warranties on the deck waterproofing. Mounting holes drilled through stucco damage or destroy the water resistant barrier inside the wall. Water penetrates the wall and deck, traveling into the framing and substrate where dry-rot and termites often result.

Cable wires are often attached to the stucco with nails driven through the top of the wall, allowing water to funnel into the building cavity. Cables are supposed to be installed so the wire forms a "J" allowing water to run off the bottom of the J, instead of going into the wall.

Boards need to write rules and enforce them when it comes to satellite dishes and water intrusion! -Bill Leys, The Deck Expert

Attorneys at Board Meetings. Excellent depiction of problem owners in “Attorneys at Board Meetings”, but the second half of the question went unanswered: What is an association supposed to do when everyone in the association has either been terrorized, bullied, defamed or otherwise dissuaded from participating on the board? In some associations it gets so bad that owners sell their units rather than deal the problems, terrorism, bullying, defamation, name calling, etc. What is an association to do? -Jim Al.

RESPONSE: Recruiting volunteers is a growing problem. For more detail, see: "Losing Entire Boards."

Ranting Owners. I take serious exception your January 31st newsletter regarding the ability of one person, whether a fellow director or a member of the audience, to generate chaos and drive up legal expenses. "Their ranting, defamatory communications, and threats can force good directors off boards and create a large spike in legal expenses..." Is the general manager and the board of directors always right and the complaining homeowner always wrong?? Are you suggesting that a homeowner never has legitimate reason for complaint? -V.F.

RESPONSE: Complaining is okay. Ranting, defamation and threats are  never okay. -Adrian