RECORDING
UNRULY MEETINGS

QUESTION: Our HOA has some very contentious members at our meetings. Recently, one member rushed another and had to be held back. Our attorney suggested we start video recording the meetings. Some of the contentious members claim it violates the law and we must get permission from every one attending the meeting. Do you have an opinion on this subject?

ANSWER: I agree with your attorney. Recording and especially broadcasting your meetings to the membership will expose hotheads and bullies (both in the audience and on the board), and will go a long way toward establishing civility and decorum. Because board meetings are public forums, the board does not need the permission of attendees to videotape them.

INSURANCE AND
LITIGIOUS OWNERS

QUESTION: Our association has been sued several times by one of the members. The legal fees have been substantial and the board is concerned they may lose their directors insurance. Do you know if there is a "high risk" insurance pool for homeowner associations?

ANSWER: Associations that lose their insurance because of repeated litigation from problem owners can still get insurance through "excess and surplus lines" carriers. However, coverage will be limited, deductibles high, and premiums significant. Carriers who write "hard to place" accounts will likely be non-admitted carriers. Moreover, they may exclude known problems, such as actions filed by recognized litigious owners. Your association could anticipate paying higher premiums for about three years until your loss history improves. Once you've had no claims for three years, your insurance broker should be able to move you back to a preferred market carrier.

Stopping Litigious Owners. Litigious owners seem to revel in their dysfunctional behavior even though it isolates them and drives up everyone's dues. Insurance companies exacerbate the problem by settling lawsuits filed by problem owners, i.e., they pay the owner to go away even when the lawsuit has no merit. This only encourages more litigation from the problem owner. He/she crows about "winning" the lawsuit and then waits for an opportunity to file another one. Generally, the only way to stop a litigious owner is to take the owner's unmeritorious action to trial and beat him/her. Once they are forced to reach into their own pocket to pay the association's legal fees, they are less likely to jump into another lawsuit. Unfortunately, this strategy is hard to implement because (i) convincing an insurance carrier to stay the course is difficult, and (ii) there is no guarantee the association will win the case (even when it should). 

Thank you to Timothy Cline, President Timothy Cline Insurance Agency and Jack Socher, President Socher Insurance Agency for their feedback on surplus lines carriers.

LATE CHARGES ON FINES

QUESTION: Can an association legally charge late fees on fines that are not paid timely? I am talking about disciplinary fines that a board levies following appropriate procedures?

ANSWER: No, late fees cannot be charged against fines. The Davis-Stirling Act allows associations to levy a late charge of 10% or ten dollars, whichever is greater (unless the CC&Rs specify a lesser amount), against delinquent assessments. Civil Code §1366(e).

SURPLUS FUNDS
TO RESERVES?

QUESTION: Regarding your article on surplus budget funds, if an association rolls the excess into next year's budget, must they be applied to the operating budget or can they go into reserve budget?

ANSWER: Since most associations are underfunded in their reserves, it is usually a good idea to apply those excess funds to the reserves. There seem to be several paths to minimize the tax effect of these transfers. Donald Haney, a CPA who does taxes for homeowners associations, offered these comments:

There are no special requirements or actions required for those HOAs that file 1120H tax returns. The just must pay 30% tax on their “Non-Exempt Function Income” (mostly interest income). If an HOA wants to file federal form 1120 as a technique to obtain the 15% tax rate on their “Non Exempt Function” taxable income under $50,000, then the conventional wisdom is that every year it must comply with Internal Revenue Service (IRS) Revenue Ruling (RR) 70-604 and have their owners vote at the annual meeting to comply with the terms and conditions contained in the ruling. I have no quarrel with that path and respect those professionals who advise their clients to do so. However, I have successfully followed another path without an IRS challenge over the last 33 years.

Without going into all the IRS hierarchical rules, the Internal Revenue Code (IRC) trumps IRS Revenue Rulings. For the last 33 years we have been reporting any “Exempt Function” excess of income over expenses for an HOA in any year as a “Section 118 Contribution to Capital.” In other words, a transfer into the association's Reserve account. By using this technique we have been able to obtain the desired 15% tax rate result without requiring owners to vote at the annual election. There are several nuances to this process and it should not be done without professional advice.

RECOMMENDATION. Tax rules are constantly changing so boards should consult a qualified CPA on how best to handle these kinds of issues. -Adrian

BOARD AUTHORITY FOR
CC&R RESTATEMENT

QUESTION: Do we as a board have the authority to update our CC&Rs and increase our budget to cover the cost? Do we need to take this to the owners for a vote or can we as the board decide to do so given that our CC&Rs are more than 15 years old?

ANSWER: Boards have authority on their own to update CC&Rs, subject to budgetary limitations (5% special assessment and 20% dues increase). However, amended and restated CC&Rs, once drafted, must be approved by the membership.

FEEDBACK

Ranting Boards. In our association the BOARD yells at owners and bad mouths them. Please stop defending boards so much. Some of them are power-mad maniacs. -Trina M.

RESPONSE: When I say that ranting, defamation and threats are never okay, it cuts both ways. It's never okay for owners and it's never okay for board members. -Adrian

Last week's link to "Losing Entire Boards" was defective. This one should work.