Provisional Director
If an association has an even number of directors, equally divided and unable to agree on the management of the association's affairs, any director or member holding not less than 33 1/3 percent of the voting power may bring an action to have the court appoint a provisional director to break the deadlock. (Corp. Code § 7225(a)) A provisional director has all the rights and powers of a director until the deadlock on the board or among members is broken, or until such provisional director is removed by a court order or by the approval of a majority of all members. The director shall be entitled to such compensation as shall be fixed by the court unless otherwise agreed with the corporation. (Corp. Code § 7225(d))
Appointment. To seek the appointment of a provisional director, the petitioner states the facts of the dispute and why the board is evenly divided, and states facts showing that the board can’t resolve the deadlock. The facts should show that corporate activities can no longer be conducted to an advantage or that there is a danger that corporate property, activities, or business will be impaired or lost.
In Re Jamison Steel Corporation, the court held that a provisional director could be appointed when it was shown that the board could not decide on matters after repeated votes. It resulted in incumbent directors holding over in the office. The court stated, “We do not feel that perpetuation of existing policies or incumbent officers in office can be construed as effectively managing corporate affairs.” (In Re Jamison Steel Corp. (1958) 158 Cal.App.2d 27, 38)
In another case, there was so much dissension from the directors that they couldn’t come to any agreement. The court stated this dissension was enough grounds to appoint a provisional director. The court did not need to determine the veracity of the various deadlocked issues, only that the divisiveness was sufficient to necessitate the appointment of a provisional director. (In re Annrhon, Inc. (1993) 17 Cal.App.4th 742, 754)
Receiver - Custodian
A court-appointed receiver is a neutral third party who takes the place of an association's board of directors. Most often, this occurs when the association is in financial distress or in litigation. If the association is badly mismanaged, such that it cannot pay its bills and is at risk of bankruptcy, a receiver can be appointed to stabilize its finances. That may involve reducing services, raising dues, and imposing special assessments. A receiver can be appointed if a member or an unpaid vendor files a petition with the court.
The petition must make a factual showing of fraud, mismanagement, breach of fiduciary duties, harm, or danger. Once the showing is made, the court can appoint a third party to manage the association. (Code Civ. Proc. § 564(b)(1) and (9)) Board members are removed, and the receiver takes control of the association's money, records, insurance, contracts, utility bills, and books and records. The receiver oversees and manages the association and approves vendors, budgets, and reserve studies. He/she can retain, supervise, or terminate the management company. The receiver can approve an emergency special assessment and, with court approval, approve a special assessment. (Civ. Code § 5610; O’Toole v. Kingsbury Court)
The receiver is paid hourly out of the association's assessments. The duration of the receivership is determined by the court. When the receiver determines the association is on sound footing, he/she schedules a special meeting to elect a new board of directors. Once a new board is in place, the receiver makes a final report to the court.
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