Corporations cannot operate without boards of directors. If homeowners refuse to serve on their association's board, the management company cannot make decisions on its own and bills can't be paid. The following issues must be considered:
- Personal Exposure. 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).
- Suspended Corporation. The association can have its its corporate status suspended, which means it cannot defend itself against lawsuits.
- Deferred Maintenance. Deferred maintenance will accumulate, leading to more expensive repairs, as well as water damage and mold in the common areas, which means more litigation.
- Director Liability. In addition to owners being vulnerable to litigation, directors from the last board of record could be sued for breach of their fiduciary duties for resigning without appointing replacements.
- Market Values. The market values of units will plummet. Sellers must disclose to potential buyers the true state of the association's affairs, and buyers would likely not purchase units in the complex.
Chapter 7 Bankruptcy. A Chapter 7 bankruptcy by the 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. 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. Finally, the court can simply impose a special assessment to raise the funds necessary to pay the association's debts. (O'Toole v. Kingsbury Court.)
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 does not address the association's lack of management.
Receiver - Custodian. Another option is for one or more members of the association to petition the superior 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: Any remaining board members should immediately seek legal counsel to determine the best course of action. A court-appointed receiver may be the quickest way to limit exposure, especially if the association has no insurance.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.