A Sign of the Times? More HOAs Dealing with Embezzlement.

I have noticed a troubling trend lately. Perhaps its a sign of the serious problems in the economy throughout the country today, but I am reading more and more news articles about the embezzlement of HOA funds.

I have noticed a troubling trend lately. Perhaps its a sign of the serious problems in the economy throughout the country today, but I am reading more and more news articles about the embezzlement of HOA funds.

HOA boards have the fiduciary responsibility to protect the homeowner’s money and property. Along with that responsibility comes an obligation, for both the Board and management, to make sure that financial controls are in place to lessen the likelihood of embezzlement. Some examples of good financial controls for boards to adopt are:

  • contract oversight
  • a dual check approval process
  • monthly reconciliation of bank statements
  • regular audits
  • fidelity insurance, which covers not only the acts of the Board, but employees, and management as well.

While some might think that some of these controls limit the flexibility of the Board to make payments, or as in the case of an audit, might be expensive, they are a valuable tool for any business, much less an HOA. Keep in mind that an HOA is in charge of thousands if not millions of dollars. Such procedures just make prudent financial sense.

Homeowner Cannot Withhold Assesments in Dispute with HOA

I received a call today from a manager of an HOA telling me she had just gotten off the phone with a homeowner who was refusing to pay his assessments because he felt the association was not properly maintaining the common area in front of his residence. He stated until the HOA did its “job,” he would not be paying assessments. “Can he do that?” the manager asked.

I received a call today from a manager of an HOA telling me she had just gotten off the phone with a homeowner who was refusing to pay his assessments because he felt the association was not properly maintaining the common area in front of his residence. He stated until the HOA did its “job,” he would not be paying assessments. The manager asked, “Can he do that?” The answer, I told her, was “No!”

This issue was addressed by the court in Park Place Homeowners Association, Inc. v. Naber (1994) 29 Cal.App.4th 427. Under California law, an owner’s obligation to pay assessments is not subject to offset. As the court in Naber recognized, homeowners associations would cease to exist without the regular payment of assessment fees by its members. In fact, the need for an HOA to regularly and collect assessments from the owners is so important that the legislature has created procedures for associations to quickly and efficiently seek relief against a nonpaying owner in the form of liens and foreclosure. Permitting an owner to assert the homeowners association’s conduct as a defense or offset to an enforcement action would “seriously undermine” those rules and procedures.

That does not mean an owner is left without a remedy if the association is violating the CC&Rs. In California an owner has two options. One is the option recognized by the court in Nabor. The owner can file legal action against the association.

The other option, pursuant to California Civil Code section 1367.6, is that if an owner disagrees with the amount of an assessment, fine, penalty, late fee, collection cost, or monetary penalty imposed as a disciplinary measure, and the amount in dispute is within the jurisdictional limit of the small claims court, the owner may, in addition to pursuing dispute resolution, pay the disputed amount and all other amounts levied under protest and commence an action in the small claims court. This allows the association to meet its financial obligations by allowing for the regular payment of assessments, and still allows an owner to avoid the unpleasant option and uncertainty of facing foreclosure as a result of failing to pay their assessments while providing protection that if there is a error on the part of the association, there are several methods to bring that error to the attention of the association, or if necessary, to a judge.

2009 California HOA Legislative Update

With the end of year upon us, I thought it would be a good time to post a summary some of the laws enacted in California during 2009 that impact our local homeowners associations. This is not a complete list of all new legislation, but rather brief summaries of the statutes I believe will have the biggest impact on California HOAs. The full impact of 2009 California legislation on an HOA will require a more detailed analysis. Any HOA that has questions on the impact of a new law should consult with their corporate counsel.

Just a BillWith the end of year upon us, I thought it would be a good time to post a summary some of the laws enacted in California during 2009 that impact our local homeowners associations. This is not a complete list of all new legislation, but rather brief summaries of the statutes I believe will have the biggest impact on California HOAs. The full impact of 2009 California legislation on an HOA will require a more detailed analysis. Any HOA that has questions on the impact of a new law should consult with their corporate counsel.

1. AB 313 (Fletcher) Assessments

This statute will allow those HOAs whose declarations allow assessments to be based on the assessed value of the individual separate interests to continue to assess in this fashion, but will prohibit other existing and newly formed HOAs to do so.

2. AB 899 (Torres) Disclosures

This statute imposes three new requirements on HOAs. The first requirement is that the title of the Assessment and Reserve Funding form disclosure must now include the ending date of the fiscal year for which it was prepared, and the form must disclose the rate of return and inflation rate assumptions used by HOA in its reserve planning.

The second requirement this statute places on HOAs relates to agreements by members to receive delivery of documents via email, facsimile or other electronic means.  Such agreements must now comply with consumer consent and disclosure requirements of California Corporations Code section 20, and the Federal E-Sign Statute, 15 U.S.C. section 7001(c)(1).

Lastly, this statute adds a new section to the Davis-Stirling Act, Civil Code, section 1363.005, which requires every Association to distribute, upon request by a member, a document disclosure index identifying the disclosures provided by the HOA, along with a reference to the Civil Code section requiring that disclosure.

3. AB 1061 (Lieu) Water-Efficient Landscapes

This statute is one I have written about before here on HOA Brief. This statute amends section 1353.8 of the Davis-Stirling Act, and restricts an HOA’s architectural standards and other governing documents from prohibiting or providing conditions that hinder or prohibit use of low-water usage plants. In addition, this statute requires compliance with local water ordinances.

4. AB 1233 (Silva)

AB 1233 amends the Non-Profit section of the California Corporations code relating to nonprofit mutual benefit corporations (most HOAs in California are non-profit mutual benefit corporations). Subject to certain limitations, AB 1233 authorizes the articles or bylaws to require the presence of one or more specified directors in order to constitute a quorum to transact business. In addition, this statute prohibits a committee exercising the authority of the board from including as members persons who are not directors of the corporation. However, the statute does not prevent a committee which is not exercising the authority of the board from including a non-board member on the committee.

In my opinion, this statute is also the most troubling for HOAs. This statute also alters the protections afforded directors where the HOA had appropriate insurance in place. Prior to the passage of this statute, existing law prohibited a cause of action for monetary damages from arising against any director or officer of a nonprofit corporation, who served without compensation, on account of any specified negligent act or omission if the HOA had a general liability insurance policy in a specified amount in force both at the time of the injury and at the time the claim was made. With the enactment of this bill those causes of action now are only prohibited if the HOA maintains a liability insurance policy that is applicable to the claim. That means that if a claim is not covered, the directors may face liability, despite the fact that there is a general liability policy in place. I fear this will have a negative impact on the ability of HOAs to get people to volunteer and serve as directors. This is already difficult enough. There are many communities where people refuse to serve, and there are perpetual openings on the board. Now people who already hesitate to serve will have another reason to refuse to do so.

Governator Terminates HOA Bill Allowing Boards to Enter into Long Term Conservation Contracts

Gov. Schwarzenegger recently vetoed California’s AB 1328. AB 1328 would have provided that a homeowners association could enter into a contract for a water or energy efficiency program, for a term of up to five years, if the board of directors reasonably anticipated that the contract would result in verifiable savings to the association.

vetoGov. Schwarzenegger recently vetoed California’s AB 1328. AB 1328 would have provided that a homeowners association could enter into a contract for a water or energy efficiency program, for a term of up to five years without owner approval, if the board of directors reasonably anticipated that the contract would result in verifiable savings to the association. This would have allowed HOAs to take advantage of long term savings and actively engage in energy conversation which is essentially mandated by California’s AB 32.  However, the Governator vetoed the bill claiming that it was unnecessary and would override the requirement that most contracts which are longer than one year obtain homeowner approval.

AB 1328 would have allowed HOAs, and by extension homeowners, the ability to obtain long term savings if they were able to locate vendors to provide extended water and energy conservation programs for their community. Boards are required to use sound business judgment and protect the assets of an Association.  Further, under the bill homeowners were to be notified of the terms of the contracts and provided an opportunity to be heard at an open meeting prior to the Board’s execution of any such contracts. It seems that there were sufficient protections in place to allow Boards to explore and enter into these types of long term contracts. Remember, Boards would not be required to enter into such contracts. The bill just would have given Boards the flexibility to enter into longer term contracts if sufficient savings could be found.

It is disappointing that while California’s State government continues to impose regulations on local entities such as HOAs, it also deprives them of tools which would allow them to meet the requirements at a reduced cost.

The California Association of Community Managers (CACM) and the California Association of Realtors (CAR) both supported the bill. The Executive Council of Homeowners (ECHO) was neutral.

HOA Boards Need not be Afraid to Enforce CC&Rs.

“Enforcement-Phobia” is the chronic fear of the political, financial and social costs of taking action to enforce an Association’s governing documents.

The “disease” starts when directors and managers are blind to the real conditions of properties overgrown with weeds, cluttered with unapproved architectural changes and overrun with over-sized vehicles parking on too narrow, private streets.

Roger Wood of Carpenter Hazelwood in Arizona, just posted an article about a common problem facing Homeowners Association Boards in the current economic climate. This is an issue we have experienced here in California as well. He calls it “Enforcement-Phobia”.  According to Roger, “Enforcement-Phobia” is the chronic fear of the political, financial and social costs of taking action to enforce an Association’s governing documents.

The “disease” starts when directors and managers are blind to the real conditions of properties overgrown with weeds, cluttered with unapproved architectural changes and overrun with over-sized vehicles parking on too narrow, private streets.  The neglected home may be the source of great frustration in the neighborhood, but the Board responds with lackluster empathy and empty pockets. The deeper the disease digs into communities the less inclined an Association and its leaders are to take any action. Symptoms of owner neglect and Association ignorance of that neglect lead only to more neglect.

The key to treating the “Enforcement Phobia” is to realize that the CC&Rs, as well as the rules and regulations, are in place to uphold property values.  Failing to enforce them is a disservice to the community. As Roger points out, a Board has the power (and in Arizona and California at least, the legal obligation) to enforce the express terms of the association’s governing documents.  The disease can be stopped and the vicious spread of unresolved CC&R violations curtailed.  The cure for this phobia is simple to enforce the association’s documents.  Roger offers some good prescriptions for helping your community properly enforce its restrictions and to gain an owner’s compliance. Among them are:

  1. Be fair and consistent in your approach to inspecting properties and notifying owners about their violations;
  2. Have a comprehensive enforcement policy and follow it;
  3. If a particular CC&R provision is troublesome or universally unenforceable, amend it;
  4. Think about increasing fine amounts to levels that would deter owners from continuing CC&R violations;
  5. Communicate well and often with homeowners about violations and about the path to compliance; and
  6. Use self-help (if allowed by the CC&Rs) thoughtfully.

You can read the full article here.