By
Jeffrey A. Barnett, Esq.
January 9, 2006
Introduction
This summary of case law and legislative developments distills the legal developments in the 2005 calendar year. The full text of the statutes discussed in this review may be read in full at http://www.leginfo.ca.gov/calaw.html and the full text of the cases can be found at http://www.findlaw.com/cacases/.
Statutory Developments
SB 61 (Battin)
Effective July 1, 2006
This Bill makes far ranging changes to the procedures associations, both incorporated and unincorporated must follow in conducting elections. This summary highlights some of the key revisions.
Mandatory Rules and Procedure
(CC 1363.03)
This law requires that associations adopt rules regarding elections. These must be adopted in accordance with the “rule change” procedure. Specifically, the rules must (1) ensure candidates have equal access to the newsletter and website to express their point of view on association issues; (2) ensure candidates have equal access to meeting space; (3) provide for nomination of candidates, including self-nomination; (4) specify qualifications for voting, the authenticity, validity and effect of proxies; and (5) specify the procedure for the appointment of one or three inspectors of election. Note, many of these topics are covered in the bylaws of incorporated associations, but the rule adoption is still required.
Secret Ballot Procedure
(CC 1363.03(c))
The new statutory secret ballot procedure must be followed for elections to the board of directors, assessment increases, amendments to the governing instruments and grants of exclusive use rights in the common area. Granting exclusive use rights requires the approval of two-thirds (2/3rds) of the members under Civil Code Section 1363.07. One or three inspectors must be appointed to supervise election procedures.
Role of the Inspectors
(CC 1363.03(c)(1)-(4)
The role of the inspector(s) under the mandatory rules is broad and generally follows the powers of inspectors under the Corporations Code. Examples include determining if a quorum exists, validating proxies, tabulating the result and determining the outcome of the election. Tabulation occurs at an open meeting.
Proxy Issues
(CC 1363(d)
Directions to the proxy holder must be set out on a separate page of the proxy that can be removed and returned to the voter. The proxy holder must vote the ballot by secret ballot.
Ballot and Voting Requirements
(CC 1363(e)
For the subject election topics, the association must mail out the ballot at least thirty days before the deadline. The members must receive an instruction sheet and two preaddressed envelopes. The ballot cannot identify the voter by name, address or otherwise. The ballot is marked and then placed in a plain envelope. That envelope is then placed in an outer envelope on which the member. The member prints and signs his name and inserts his address and lot or unit number in the upper left hand corner of the outer envelope, which is addressed to the inspector(s) of election. Members may observe the counting and tabulation of the vote. Only the inspectors may open the ballot envelopes.
Post Election Procedures
(CC 1363(g)-(i))
The election results must be promptly reported by the inspector(s) to the board of directors, recorded in the minutes of the next board meeting and must be available for review by the members. The board must communicate the results of the election to the members within fifteen (15) days of the election. Custody of the sealed ballots must be kept by or under the control of the inspector(s). After the election, the association must store the ballots in a secure place for at least one year from the date of the election. IF there is an election challenge, the ballots must be available for inspection by the members or their representatives. Recounts must preserve the confidentiality of the vote.
SB 394 (Niello)
Effective January 1, 2006
This law modified the fair housing disclosure cover sheet that must be attached to each copy of the declaration, governing document or deed that is distributed to any person. The nondiscrimination statement now must refer to sexual orientation and source of income in addition to race, color, religion, sex, familial status, marital status, disability and national origin. The procedure to cause the removal of discriminatory language from the governing documents has been revised. The removal of discriminatory language from the governing documents now requires a prior review by the county counsel.
AB 1098 (Jones)
Effective July 1, 2006
This lengthy bill mandates a two-thirds (2/3rds) membership vote on to grant exclusive use of any portion of the common area, with certain minor exceptions, specifies the terms for member inspection and copying of the books and records or the association.
Creating EUCA
Generally, two thirds (2/3rds) of the members must approve grant of an exclusive use of the common area. Of the limited exceptions where the board may make the exclusive use grant without a vote of the members, most are technical and unlikely to arise, such as encroachments due to construction or engineering errors. One exception may be of more practical application. The board can authorize exclusive use rights in the common area without a membership vote to transfer the burden of management and maintenance of a portion of the common area that is generally inaccessible and is not of general use to the membership at large.
Books, Documents and Records Subject to Inspection
(Civil Code 1365.2(a))
The scope of membership inspection of association records is greatly broadened under this new law. The records subject to inspection include not only financial records currently required to be divulged, but also interim financial statements including balance sheets, income and expense statements, budget comparisons, the general ledger, executed contracts, board approval of vendor or contractor proposals, tax returns, reserve account balances and payment records, agenda and minutes of the board and committees, membership lists and check registers. Privileged material is excluded and protections exist against misuse of the membership list. Individual owners may opt out of the list by agreeing to an alternative procedure.
The law creates a new document category, “enhanced association records”. These include invoices, statements, receipts and cancelled checks, purchase orders, credit card statement and reimbursement requests.
Conditions for Inspection
(Civil Code 1365.2(b)-(d), (h))
The association is responsible for producing the requested books, documents and records prepared during the current fiscal year within ten (10) calendar days following receipt of the request. Records relating to the prior two fiscal years must be produced within thirty (30) days of the receipt of the request. Existing statutory disclosure timeframes are preserved.
Before copying the documents, the association must give the requesting party an estimate of the direct and actual charges that the member will be responsible to pay.
The place for the inspection is the association’s onsite office, or, if none, the association and member must agree on the location. If no agreement is reached, the association may mail.
The owner is responsible for the association’s cost to redact privileged material, or that which could invade privacy, or lead to identity theft or fraud, from the records it produces, at a rate of ten dollars ($10.00) per hour not to exceed two hundred dollars ($200.00). Again, this expense must be estimated and communicated in advance. Examples of protected material required to be redacted from the association records include records of disciplinary actions, collection activities, payment plans, social security numbers, executive session minutes, and personnel records.
At the request of the member who ordered the records, the association must provide a legal explanation for the material that is redacted.
The member requesting the records has the option of requiring that the records be delivered in electronic form, provided that the electronic file can be transmitted so that redacted material cannot be altered. The association only may recover the cost of producing the record in the electronic format.
SB 137 (Ducheny)
Effective January 1, 2006
This lengthy bill makes sweeping changes in the law governing assessment collection. Its impact on the CID industry is far-reaching. The usual cautions concerning brief summaries of lengthy statutes apply with force in this case.
Statutory Disclosure
(CC 1365.1(b))
The new law revises the content of the statutory disclosure that must be distributed to the members 60 days immediately preceding the start of the association’s fiscal year. The form of the notice addresses certain innovations in the law, including: (1) the fact that liens recorded after January 1, 2006 cannot be foreclosed if the principal amount of the debt is less than $1,800; (2) the association must comply with the new pre-lien requirements, or the lien cannot be recorded, and correction of the error is at the sole expense of the association; (3) owners may challenge an assessment debt by requesting dispute resolution with the association, and foreclosure is barred until dispute resolution is completed; and (4) the board must meet with an owner who makes a proper written request for a meeting to discuss a payment plan.
Secondary Address
(CC 1365.1(c))
An innovation in the law is the right of a member to give written notice to the association of a secondary address. If provided, the association is obligated to mail all correspondence and legal notices relating to assessments to both the primary and secondary addresses. Failure to give notice to the secondary address invalidates the lien and the collection process must be recommenced at the association’s expense. CC 1367.1(l).
Pre-Lien Notice
(CC 1367.1(a))
The law changes the pre-lien notice required to be served on the owner of record at least 30 days prior to lien recordation. The notice now includes: (1) the right to dispute the assessment by submitting a request to meet and confer with the association; and (2) the right to request alternative dispute resolution before the association may initiate foreclosure.
Pre-Foreclosure Meet & Confer
(CC 1367.1(c))
Association must now give notice of the owner’s right to meet and confer or complete alternative dispute resolution with the association regarding the assessment issues not only before the lien is recorded, but also before foreclosure is commenced. In the case of the pre-foreclosure meet and confer, the owner may select the specific type of alternative dispute resolution, “internal” under Civil Code Section 1363.810 or “external” under Civil Code Section 1369.510. Binding arbitration is prohibited if the association intends to use judicial foreclosure. The former requirement of Civil Code Section 1366.3 that the owner pay in full as a condition of the right to alternative dispute resolution was deleted.
Decision to Lien – Open Meeting
(CC 1367.1(c)(2))
Under the new law, only the board of directors (and not the manager or other agent) may decide whether to record a lien, and the board’s decision must be in an open meeting. A majority of the board (not a majority of a quorum) must so vote, and the minutes must reflect the vote.
Payment Plans
(CC 1367.1(c)(3))
Owners may request to meet and confer with the board. The board must meet with the owner within 45 days of the postmark of the request, if the request was made within 15 days of the postmark of the pre-lien notice. The alternative time, for late requests, is not specified. If no regularly scheduled board meeting is set within the 45 day timeframe, a special meeting does not have to be scheduled. Instead, the law allows one or more board members to meet with the owner concerning the payment plan. Payment plan standards are not required, but are advisable. The payment plan terms may include the duty to pay ongoing assessment installments and the right to record a lien, but no additional late charges are permitted if payment plan terms are met. If the owner defaults in the payment plan, the association may resume its original collection efforts.
Notice to Representative
(CC 1367.1(j))
Assessment lien foreclosures have generally been conducted in the manner of foreclosures on deeds of trust. However, the law now requires that the association give a special additional notice. The notice of default must be served on the “owner’s legal representative” in the manner that lawsuits are served. In the case of a trust or a corporation, it is clear that a representative is required to be noticed. In the usual case of an individual owner(s) who have no legal representatives, this legal notice requirement is unclear.
$1,800 Threshold – Small Claims
(CC 1367.4; CCP 116.540)
For assessment debts arising after January 1, 2006, a lien may be recorded, but no foreclosure is possible if the principal amount of the indebtedness is $1,800 or less, or represents less than 12 months of arrears. Late charges, interest, attorney’s fees and accelerated assessments are excluded in determining the $1,800 threshold. Small claims suits are permitted to the jurisdictional limit. The court may include in its award assessments accruing after the filing date up to the hearing date. Suit under the limited jurisdiction provisions of the Superior Court is also possible. The association may appear in Small Claims Court through an agent or a management company representative or bookkeeper, if the representative files a declaration stating that he or she is authorized to appear, and states the basis for that authorization. A resolution of the board of directors is advisable.
Decision to Foreclose
(CC 1367.4(c)(2), (3))
As with the decision to record a lien, the decision to foreclose a lien must be made by the board itself. This decision must be made in executive session, by a majority of the board, and with appropriate notation in the minutes. The decision to foreclose is confidential, and the board is obligated to refer to the property by parcel number, rather than address. The decision to foreclose must occur at least 30 days before sale. Notice of the board’s decision to foreclose must be given to the owner in occupancy or the owner’s legal representative. If the property is not owner occupied, it must be sent first class mail to the current address as shown on the association’s books, which is presumably the property address if no other address is provided.
Right of Redemption
(CC 1367.4(c)(4))
Historically, California allowed no right of redemption (re-purchase) following a non-judicial foreclosure sale. The new law allows the owner who lost his property the right to buy it back within 90 days of the sale for the full amount of the foreclosure sale price. The association or other foreclosure sale purchaser will not have “clear title” during this period.
Pay for Errors
(CC 1367.5)
If alternative dispute resolution (internal or external) results in a finding that the association erroneously recorded a lien, the association must remove from the owner's account all related charges, including late charges, interest, attorney's fees, recording and collection costs.
Conclusion
The assessment collection process becomes far more complex beginning January 1, 2006. New collection policies will be necessary to be consistent with the law. Careful administrative procedures will be necessary to assure that all required procedural steps are followed during the collection process. In the areas where the new law is ambiguous, it is necessary to develop best practices consistent with the intent of the Legislature and incorporate these in the assessment collection policy.
Case Law Developments
Arias vs. Katella Townhouse Homeowners Assn., Inc., 127 Cal. App. 4th 847, 26 Cal. Rptr. 3d 113 (2005).
Marina Arias owned a condominium in the Katella Townhouse subdivision. She sued the Association for failure to maintain and repair the common area causing toxic mold to develop in and around her unit. In a jury trial, Ms. Arias and the Association, through their counsel, signed a stipulation of facts which was read to the jury, and in which the Association admitted (1) breaching the declaration of covenants, conditions and restrictions; (2) breaching its duty of maintenance under Civil Code Section 1364; and (3) breaching the common law duty of due care by failing to maintain the common areas of the project and to repair damage to her unit caused by common area sources. The parties further agreed that the Association had or would pay the property damage and alternate housing, and to clean, store and return her personal property and pay her costs of investigation and mold testing. The Association also agreed to pay approximately $50,000 to repair the condominium unit, including mold remediation, removing and replacing affected drywall, repainting the unit, and removing carpet and vinyl flooring. The Association further agreed that it would perform its duties under Civil Code Section 1364(a) and the CC&Rs to repair the common area affecting her unit, as well as her unit.
The jury awarded the Plaintiff $3,900 dollars for past economic damages and $2,500 for future economic damages, and denied recovery for claimed non-economic losses.
Both the Association and Ms. Arias made motions to the court for attorney's fees and costs. The trial court found that Mr. Arias was the prevailing party and awarded attorney's fees of almost $100,000, reducing her claim for attorney's fees by about $30,000.
The appellate court held that Ms. Arias was the prevailing party, and that she was entitled to attorney's fees based on her claim that the CC&Rs had been breached by the Association. In addition, the court found she was entitled to attorney's fees under Civil Code Section 1354(c), as her complaint sought enforcement of the CC&Rs.
Finally, the Court found that a statutory pre-trial offer by the Association of $50,000 under Code of Civil Procedure Section 998 could not deprive the Plaintiff of the right to recover attorney's fees and costs. The jury's verdict of $6,400, added to the Association's post-offer payments of $88,939.75, exceeded the Association's $50,001 offer.
Bear Creek Master Assn. v. Edwards,130 Cal. App. 4th 1470, 31 Cal. Rptr. 3d 337 (2005).
The Bear Creek Master Association (Bear Creek), the master homeowners' association for the master Bear Creek development, brought an action against Parlan L. Edwards and Gloria Renico Edwards, as trustees of the Edwards Family Trust (the Trust), for breach of contract and foreclosure on eight unbuilt condominium units within the development. The Trust acquired the property through foreclosure; the Trust never reviewed the Bear Creek CC&Rs applicable to the property and did not receive a title report before foreclosing on the property.
A key issue in this appeal was whether a homeowners' association may charge homeowners' association dues or assessments for unbuilt property within a planned and partially built homeowners' association development. The appellate court held that the Trust was required to pay association's assessments, even though the structures had not yet been built because under the Davis-Stirling Common Interest Development Act the Trust owned eight condominiums.
The Trust alleged that they had no duty to pay assessments on the eight condominiums under either statutory law or Bear Creek's CC&Rs because assessments pertain only to an existing structure and the absence of a building or structure should be considered Avacant” land which cannot possibly fall within the definition of a Acondominium” for purposes of levying assessments. The appellate court rejected this definition of Acondominium” finding that under the Davis-Stirling Common Interest Development Act (Civil Code Section 1350) the legislature adopted a definition for a condominium to mean a separate interest in Aspace” which falls within boundaries described in a properly recorded document. Based on the Act, the court defined Aspace” to consist of air, earth or water, or any combination, so long as the boundaries of that Aspace” are adequately recorded in a proper document. Thus, a structure or building is not required for a homeowners' association to levy an assessment on a condominium, so long as a properly recorded document describes the boundaries of such Aspace”. The evidence recited in the Trust's foreclosure deed demonstrated the boundaries of such Aspace” because the Trust received a fee simple interest for each of the eight condominium units.
Finding that the Trust had a duty to pay assessments on the unbuilt condominium units, the next question raised was when the assessments become due. The court found that under both the Davis-Stirling Act and the Bear Creek CC&Rs the triggering events for when assessments become due upon all units within a common interest development occurs after the first unit in a phase has sold, whether or not the unit had been built out.
This case is instructive by defining the duty to pay dues on vacant land. DRE regulations also come into play.
Brown v. Prof. Community Management, Inc., 127 Cal. App. 4th 532, 25 Cal. Rptr. 3d 617 (2005).
A homeowner brought an action against her homeowners association and its property management company alleging that she, and the class she purported to represent, had been charged assessments or fees exceeding the amount necessary to defray the costs for which the assessment or fees had been levied in violation of Civil Code Section 1366.1. As a consequence, she claimed negligence, a violation of Section 52.1 and Article I of the California Constitution, civil conspiracy in violation of Section 1750 and following of the Consumer Legal Remedies Act. The trial court dismissed her claims.
The appellate court found that the trial court properly dismissed the claims of the homeowner. The appellate court found that Civil Code Section 1366.1 constrains homeowners associations, but not other parties, such as a management company, from charging fees or assessments in excess of the costs for which they are charged. The court noted that the contracts of vendors hired by the Association may necessarily include a profit. The Association does not violate Section 1366.1 by passing through such costs.
Here the homeowner claimed that a management's fees for late letters and lien letters violated Civil Code Section 1366.1. That the court held that the fees are not unlawful unless they exceed the association's costs, which may include a fee or profit component. In short, the court found that Section 1366.1 has no application to an association's vendors.
The court further held that the homeowner could not claim a conspiracy between the homeowners association and the management company to violate Section 1366.1. The court ruled that the management company was not liable under a conspiracy theory as the duty not to charge excess assessments was owed only by the homeowners association.
James F. O'Toole Company, Inc. vs. Los Angeles Kingsbury Court Owners Association, 126 Cal. App. 4th 549, 23 Cal. Rptr. 3d 894 (2005)
A homeowners association failed to pay the insurance adjuster it had hired following the Northridge earthquake. The adjuster was entitled to ten percent (10%) of the proceeds. The association received about $1.4 million in insurance proceeds. The adjuster obtained a judgment which the association did not pay. The adjuster applied for an order requiring assignment of regular and special assessments to him, but the association filed a claim of exemption under Civil Code Section 1366(c) and the trial court agreed with the association's position on exemption. However, the trial court also found that the judgment was an Aextraordinary expense” under Civil Code Section 1366(b), so the association could levy an emergency assessment to satisfy the judgment. The court ordered the members to meet to discuss an emergency assessment to satisfy the judgment. The members met but refused to impose an emergency assessment. The adjuster then filed a motion with the court directing the Association to levy a special assessment or appoint a receiver to levy the special emergency assessment. The trial court granted the adjuster's motion for the appointment of a receiver to levy and administer a special emergency assessment. This decision was affirmed on appeal.
Reviewing the legislative history, the court found that the legislature protected regular assessments to the extent necessary to insure that homeowners were not deprived of essential services, and at the same time protected the rights of judgment creditors, such as the adjuster, by allowing them to execute against an association's special emergency assessments and, where available, an association's excess (non-exempt) regular assessments.
The court rejected the association's argument that it had a Abusiness judgment” right to refuse to impose a special emergency assessment.
Skistimas v. Old World Owners Assn., 127 Cal. App. 4th 948, 26 Cal. Rptr. 3d 319 (2005).
Plaintiff Alfred Skistimas (“Skistimas”) sued the individual members of the board of the Old World Owners Association (the “Association”) for violating certain provisions of the CC&Rs and for defamation. The trial court ultimately entered judgment against Skistimas on the entire complaint and awarded attorney fees and costs to the defendants, but denied defendants' request for expert witness fees under Section 998 of California's Code of Civil Procedure because it was the Association's insurer rather than the individual defendants who made the settlement offers. Skistimas appealed from the judgment and the individual defendants appealed from the denial of expert witness fees.
The court of appeals affirmed the judgment against Skistimas, but reversed the trial court order denying an award of expert witness fees to the defendants. Of importance in this appeal was the court's finding that there is no statutory language under Civil Code Section 998 to support treating expert witness fees differently than attorney fee awards. Therefore, whether the individual defendants paid the expert witness fees out of their own pockets or their insurer paid the fees on their behalf should not be determinative of the right to recover such fees, the critical issue is whether such fees have been actually incurred. In essence, the court extended its precedent for attorney fee awards to expert witness fees: under Section 998 a litigant may recover fees even though he has not paid them out of his own pocket. The order denying an award of expert witness fees to the defendants was remanded to the trial court for further proceedings.
Tilley v. CZ Master Assn., 131 Cal. App. 4th 464, 32 Cal. Rptr. 3d 151 (2005).
Plaintiff Tilley (Tilley), a security guard employed by BonaFide Security Services (BonaFide), Inc., sued CZ Master Association (CZ), a homeowner's association which had contracted with BonaFide for security services, for injuries that he suffered when he responded to a complaint about a youth party and was assaulted. Tilley brought claims for negligence, negligent supervision of contract, and premises liability. The trial court granted summary judgment in CZ's favor, concluding that: CZ had no liability for the injuries suffered by the employee of an independent contractor (BonaFide) which it hired to perform work on its premises; CZ owed Tilley no duty to restrict access to the community's premises; and, Tilley had assumed the risk of injuries he suffered. The appellate court affirmed the trial court's judgment and completed an analysis on the applicability of the Apeculiar risk doctrine@ for such a situation, discussed below.
Tilley was assaulted after he attempted to arrest two partygoers at a youth party. The court applied the Apeculiar risk doctrine” and found that CZ was not liable for its alleged failure to exercise its retained control over the property so as to restrict or control the youth parties in the development. The Apeculiar risk doctrine” means that one who employs an independent contractor, in this case CZ employing BonaFide, to do work which the employer should recognize as likely to create a peculiar unreasonable risk of physical harm to others, unless special precautions are taken, is subject to liability for physical harm caused to them by the absence of special precautions.
However, the scope of the Apeculiar risk doctrine” is narrowed as applied to landowner's liability under the Privette doctrine. Under the Privette doctrine, a landowner's liability under the Apeculiar risk doctrine” does not always extend to the employees of the independent contractor; rather, the Apeculiar risk doctrine” will apply to employees of an independent contractor where the hirer's exercise of retained control affirmatively contributed to the employee's injuries. Here, the court found that there was no evidence that CZ's exercise of authority it retained over the premises affirmatively contributed to Tilley's injuries because CZ permitting others to have access to the premises for parties, an action which may increase the danger of injury to BonaFide's employees, was merely passive.
The court further found that CZ owed Tilley no independent duty to restrict parties thrown by its homeowners or to control the number of nonresidents allowed to attend parties and summary judgment would have also been appropriate under the primary assumption of risk doctrine because there exist an inherent risk of danger assumed by security guards.
Woodbridge Escondido Property Owners Assn. v. Nielsen, 130 Cal. App. 4th 559, 30 Cal. Rptr. 3d 15 (2005).
Plaintiff Woodbridge Escondido Property Owners Association (Association) architectural committee granted permission to defendant Paul Nielsen (Nielsen) for the construction of a wood deck which encroached upon a side yard easement of his neighbor. The CC&R expressly prohibited the installation of Aany permanent structure other than irrigation systems” on the easement. The Association's board of directors later learned that the architectural committee had erroneously granted construction of the grant and ordered Nielsen to remove that portion of the deck which encroached on the easement, offering to pay for removal costs.
At issue in this appeal was whether the Association had met its evidentiary burden of proof in demonstrating that the deck was a permanent structure within the meaning of the CC&R. Homeowner Nielsen alleged that there was no evidence to support the Association's contention that the deck was a permanent structure. However, the appellate court concluded that the Association had met its burden of proof by providing photographic evidence and a declaration to show that the deck was a permanent structure within the meaning of the CC&R. Furthermore, the court found that because the CC&R expressly prohibited the construction, the Association's act of requiring the removal of the deck was not arbitrary, because it was based on the explicit language of the CC&R and was in response to the erroneous approval of the architectural committee.
This case is helpful to associations which need to correct erroneous architectural approvals and are prepared to pay for their mistakes.