2006 Statute and Case Law Update

By
Jeffrey A. Barnett, Esq.

New Legislation

SB 1560

In September, 2006, the California Legislature enacted the "cleanup" legislation to address certain criticisms of SB 61, the election law which became effective July 1, 2006. The impact of SB 61 is described in my 2005 Statute and Case Law Update. The cleanup legislation became effective retroactive to July 1, 2006. The key changes made by SB 1560 can be summarized as follows:

Allows the inspector to appoint and oversee additional persons to verify signatures and to count and tabulate votes, on the condition that these assistants are independent third parties.

Added removal of members of the board as a category of votes that must be conducted by secret written ballot, in addition to the election of directors, amendments to the governing documents, grants of exclusive use common area property and votes on assessments.

Clarifies that the quorum requirements in the bylaws apply to secret ballot elections, and that each ballot received by the inspector is treated as a member present at a meeting for purposes of determining the quorum.

Requires cumulative voting for the election of directors by secret ballot if cumulative voting "is provided for in the governing documents". Note that the Corporations Code permits cumulative voting unless prohibited in the bylaws. If the bylaws do not mandate cumulative voting, but do not prohibit it either, cumulative voting may be required in the secret ballot process.

Recognizes business entities as independent third parties who may be inspectors of election.

Requires that the inspector’s determination of the closing of the polls be consistent with the governing documents.

Requires the inspectors to determine the tabulated results of the election.

Clarifies that proxies are distinct from secret written ballots, and that proxies may be used if permitted by the bylaws and meet the requirements of the governing documents. Further clarifies that the association is not required to prepare or distribute proxies as part of the election process.

Specifies that proxies may be revoked prior to receipt of the ballot by the inspectors.

Modifies the information required to be placed on the outer envelope by the voter. Specifically, the voter must sign his or her name, indicate his or her name, and indicate the address or separate interest identifier entitling him or her to vote.

Authorizes the inspector of election, or a designee, to verify that the member’s information and signature on the outer ballot prior to the meeting at which the ballots are tabulated. Further specifies that ballots are irrevocable once received by the inspector of elections.

Requires the inspectors to maintain physical custody of the ballots until nine months after the election, at which time custody is transferred to the association. The inspectors must make the ballots available for inspection if there is a recount or other challenge to the election process. Recounts must be conducted in a manner preserving the confidentiality of the vote. The ballots must be stored by the association for at least one year after custody is transferred from the inspectors.

Allows the election rules to provide for nomination of candidates from the floor or by any other manner, and permits the rules to allow right write-in candidates.

Clarifies that an election may be conducted entirely by mail unless otherwise specified in the governing documents. However, an open meeting of the board or members is still required to count the votes.

Resolves conflicts between the Davis-Stirling Act and the Corporations Code by specifying that the new election law for homeowners associations controls.

Association may deliver specifically identified records requested under a Civil Code Section 1365.2 by electronic transmission or machine readable storage media as long as those records can be transmitted in a redacted format that prevents the records from being altered.

AB 2100

This new law makes material changes to the requirements for reserve studies and the disclosure of the results of the reserve studies. The annual summary of the reserves which must be included in the pro forma operating budget must now additionally include the following:

The current deficiency in reserve funding expressed on a per unit basis. This is determined by subtracting the amount of actual cash reserves from the estimate of the cash reserves necessary, and dividing the result by the number of residences in the community. If reserves are prorated, the proper adjustment must be made to reflect the per-unit reserve deficiency.

The budget must disclose whether the board has determined to defer repair or replacement of any major component with a remaining life of 30 years or less. If deferral is occurring, a statement of justification is required.

More detail is required in the budget disclosures concerning anticipated special assessments. If a special assessment is anticipated, the disclosure must include the estimated amount, commencement date, and duration of the assessment.

The budget must describe the mechanism by which the board will fund reserves including assessments, borrowing, the use of other assets, deferral or alternative mechanisms.

Whether the association has any outstanding loans with an original term of more than one year, including the bank, interest rate, amount outstanding, annual payment, and expected payoff date.

A statutory form summarizing reserve funding is now mandated. The form is found at Civil Code section 1365.2.5. The calculation of the reserves in this form may not assume a rate of return on reserves in excess of 2% above the Federal Reserve Bank discount rate. If the reserve study reflects that special assessments will be required to meet the association's repair and replacement obligations over the next 30 years, the approximate date and per-unit amount of the anticipated special assessment must be disclosed.

Commencing January 1, 2009, a summary of the reserve funding plan adopted by the board must be included in the pro forma operating budget, with a disclosure to the members that the full reserve study plan is available upon request.

The reserve funding plan that is now required to be included in the reserve study must be adopted by the board at an open meeting. If the board determines that an assessment increase is necessary to fund the reserve funding plan, the assessment increase shall be approved in a separate action of the board. In other words, the board is still subject to the requirement for membership approval of special assessments in excess of 5% of the budgeted gross expenses (except for defined emergency assessments) or in excess of the 20% annual increase in the regular assessment.

AB 2624

This bill made a number of technical changes relating to the collection of assessments by homeowners associations through nonjudicial foreclosure.

This legislation:

Authorizes the foreclosure trustee to receive fees for the cost of service of either a notice of default or the decision of the board to foreclose upon a residence.

Clarifies the parties who received the notice of default. This is the owner of record in the association's records, unless another person has been designated by the owner as his or her legal representative in a writing mailed to the association.

Requires the notice of sale in the nonjudicial foreclosure process to now include a statement that the property is being sold subject to a right of redemption. Owners have 90 days after the foreclosure sale to repurchase the property for the amount of the delinquency plus accrued foreclosure costs.

Specifies that the nonjudicial foreclosure procedures associated with assessment liens are privileged communications, which protect the association and its agents from certain liabilities.

AB 1881

This bill added Civil Code section 1353.8 to the Civil Code. The new statute prohibits the architectural guidelines of a common interest development from prohibiting or including conditions that have the effect of prohibiting the use of low water-using plants as a group. Presumably this means that the landscape standards for plantings in planned developments cannot include a blanket prohibition against succulents.

AB 2210

This bill made a number of changes to the California Vehicle Code which impact towing from homeowners associations. Among these changes are the following:

The former separate statute concerning towing from common interest developments, Vehicle Code Section 22658.2 was repealed. Towing by common interest developments is now governed by Vehicle Code Section 22658.

Legislative findings were made which authorize local authorities to license and regulate towing truck companies.

Prohibits the immobilization of the vehicle with a device designed and manufactured for the immobilization of vehicles, except by police officers and traffic enforcement officers.
The signage requirements remain a precondition for towing from an association.

A vehicle cannot be towed unless 96 hours have elapsed from the issuance of a notice of parking violation.

Towing is permitted after 24 hour notice to the local traffic law enforcement agency, if the vehicle lacks an engine, transmission, wheels, tires, doors, windshield, or any other major part or equipment necessary to operate safely on the highways.

Tow truck operators are required to give specific written notices to the registered and legal owners of the vehicle. The association and operator are liable for storage or towing charges if there is a violation of the notice requirements.

A towing company may only charge one-half of the regular towing charge if the owner of the vehicle or his agent returns to the vehicle after it is coupled to the tow truck but before it is removed from the property and is in transit.

Charges for towing and storage are limited. The penalty for violation is four times the amount charged and is a misdemeanor. Credit cards must be accepted for payment of towing and storage charges.

Vehicles cannot be towed from a common interest development without first obtaining written authorization from a representative of the association, who must be present at the time of the removal and verify the alleged violation. The written authorization must include the make, model, vehicle identification number, and license plate of the vehicle, the name, signature, job title, residential or business address and working telephone number of the person authorizing the removal of the vehicle, the grounds for removal, the time when the vehicle was first observed parked at the private property, and the time that authorization to tow the vehicle was given.

General authorization to remove a vehicle at the towing company’s discretion cannot be delegated to a towing company except in the case of the vehicle unlawfully parked within 15 feet of the fire hydrant, or in a fire lane, or in a manner which interferes with an entrance to, or exit from, and private property. That general authorization must be in a written agreement. The towing company must take a photograph of the vehicle that clearly indicates the parking violation prior to removing the vehicle.

AB 2618

This bill amended Civil Code Section 1369.520 to clarify that the request for resolution procedure applies only to enforcement actions that are solely for declaratory, injunctive or writ relief, or for that relief in conjunction with a claim for monetary damages not in excess of the Small Claims Court jurisdiction.

Case Law Update

Cebular v. Cooper Arms Homeowners Association, 142 Cal. App. 4th 1006 (2006); petition for review denied 2006 Cal Lexis 13569.

This case concerned to challenge by a homeowner to the method of allocation of assessments in a condominium project. The assessments in the condominium project were allocated on the basis of assigned shares which also determined the voting rights. The shares were assigned without reference to size or location of the unit. In fact, some larger units had fewer shares. The owner contended that the distribution of shares was inequitable, arbitrary and capricious and argued that the distribution of assessments should be reallocated on an equal basis because the members were entitled to equally share the common area of the subdivision. The owner further challenged the assessments as an unfair business practice in violation of Business and Professions Code Section 17200 and as a violation of Corporations Code Section 7312.

The Court noted that when the project was converted from a stock cooperative to a condominium project, 75% of the owners agreed to maintain the method of allocation of assessments in the condominium declaration and bylaws which had prevailed under the original 1925 stock cooperatives documents. Apparently, the original shares were allocated based on the purchase price of the residences, without regard to the size of the living space or the actual maintenance, repair and replacement obligations attributable to each unit.

The California Court of Appeal upheld the trial court's ruling that the method of assessment for maintenance of common area facilities was valid. In doing so, the Court emphasized the principle that the covenants and restrictions in a declaration of a common interest development are enforceable equitable servitude, unless unreasonable. This principle of deference to equitable servitude in common interest developments is required by California Civil Code Section 1354. It has been interpreted by the California Supreme Court in Nahrstedt v. Lakeside Village Condominium Assn., 8 Cal 4th at 379-380, 382, 389 to mean that covenants, conditions or restrictions are enforceable unless the party challenging it establishes the equitable servitude to be "unreasonable" because it violates a fundamental public policy or imposes a burden on the use of the affected land that far outweighs any benefit.

The Court noted that neither the Davis-Stirling Act nor the California Code of Regulations requires equal assessments to imposed in every case. In particular, no statute or regulation in California prohibits the allocation of assessments on an unequal basis which is related to voting power in the governance of the community.

Rejecting the owner's argument that the assessment allocation scheme was arbitrary, the court found that there was a rational relationship between the greater voting rights of owners, which meant more control over the management and maintenance of the property, and that the higher assessments which were directly tied to voting rights. The Court pointed out that under the governing documents, voting power was directly related to the power to amend the documents, including potentially the method for collecting assessments, the power to call special meetings, the election and removal of directors, and other important Association election issues.

The Court further rejected the owners challenged the assessment formula violated public policy which affects the public at large. In fact, the Court found that failure to uphold the allocation formula would disrupt the fundamental public policy of upholding the expectation of the other unit owners, 75% of whom had voted to continue the assessment allocation formula when the building converted to condominium ownership.

Plaintiff contended that the assessments scheme violated Civil Code Section 1366.1 which prohibits excessive assessments, as the members shared equally in the benefits of the common areas. He further argued that the assessments scheme violated his rights under Civil Code section 1368.1 because the assessment and voting rights unfairly and unreasonably restricted the marketability of his condominium. He further cited Civil Code Section 1357.110 which prohibits unreasonable rules. Each of these points was found to be unsupported based on the particular facts of the case.

Finally, the owner challenged the assessment scheme under Corporations Code Section 7312 which generally prohibits persons from holding different categories of membership in a nonprofit mutual benefit corporation, subject to certain specific exceptions. The Court found that the articles of incorporation of the association created one type of membership, and that the governing documents lawfully created different rights and conditions of membership as allowed by Corporations Code Section 5330.

The appellate court therefore upheld the judgment of the trial court, and further awarded the homeowners association its attorney's fees and costs on appeal.

Elnekave v. Via Dolce Homeowners Association, 142 Cal. App. 4th 1193 (2006).

In this case, a court approved settlement between homeowners and their homeowners association was set aside. Homeowner sued their neighbors and their association for mold damage from a water leak which required the owners to pay for expensive repairs. At a court supervised mandatory settlement conference, an oral settlement was reached and put on the record. Present at the hearing were one of the homeowners, a representative from the management company of the association, a representative from the homeowners association's insurance company, and the attorneys for each of the parties. The management representative told the court she had the authority to settle for the homeowners association.

The oral agreement called for payment by the association's insurer of $65,000 and payment by the neighbors of $60,000, a dismissal of the lawsuit, and mutual releases. Subsequently, the parties were unable to agree on a written settlement, primarily because the attorneys for the association and the homeowners could not agree on the scope of the release regarding enforcement of the CC&Rs for any problems with the repair work. The association opposed a motion by the homeowners to enforce the settlement for two reasons. The association wanted to reserve its right to enforce the cc&rs based two considerations: (1) a steam shower the homeowners added in place of their old shower, and (2) that the employee of the outside property management firm, despite her statement of authority, could not bind the association's board of directors. The association was concerned that the homeowners had installed the steam shower without using a licensed contractor and without conforming to local building codes. The association wanted to preserve its rights against the owners related to this construction, but did not oppose a release of the mold remediation repairs.

The appellate court found that the settlement agreement, although placed on the record in court, was unenforceable because the association was not represented by an officer or director. California case law requires the personal presence of the litigants in court to bind the party to an oral settlement to ensure that the settlement is the result of mature reflection and deliberate intent. The court agreed with the homeowners association that there was no evidence that the insurance carrier for the association had the right to settle without the association's consent. The court found that the purported settlement prejudiced the association's right, separate from payment by the insurer, because the settlement limited its ability to enforce the CC&Rs for noncompliance. Accordingly, the insurance carrier could not bind the association without its direct consent in court.

Farber v. Bay View Terrace Homeowners Association, 141 Cal. App. 4th 1007 (2006).

The buyer of a condominium made a claim against the seller and the homeowners association because of damages from extensive roof leaks and the prospect of paying a $15,000 assessment by the association to make repairs. The seller contended that the association was solely responsible for the damages and sued the buyer and the association for a determination of her rights and duties under the CC&Rs as against the buyer and the association.

The buyer filed a cross-complaint against the seller, and the seller filed a cross-complaint against the association for indemnity and declaratory relief. The association filed procedural challenges against the seller's complaint and cross-complaint on grounds that the seller lacked standing to enforce the cc&rs. At the trial court level the association prevailed and was awarded $24,517 in attorney’s fees.

The appellate court agreed with the trial court that the seller of a condominium does not have standing to enforce the cc&rs. Regardless of the technical causes of action asserted by the seller, her claim was one to enforce the cc&rs by seeking a determination that the association was responsible for repair of the roof. The court reviewed objections to the fees awarded in favor of the association and ruled against the seller on each point. Moreover the Court awarded the association its costs on appeal which would include additional attorney’s fees.

Peak Investments et al. v. South Peak Homeowners Association, 140 Cal. App. 4th 1363 (2006).

This case concerns the interpretation of California Civil Code Section 1356. This statute permits the superior court to amend the cc&rs upon a vote of a majority of the members when the declaration requires a supermajority vote. In this case, the amendment was championed by owners of one lot to reduce the setback requirements for their home. The cc&rs controlled the maximum height of residences as well as front, side lot and rear lot setbacks. Through an apparent typographical error in a prior amendment, the front and rear setbacks for this owner’s lot were increased from 20 feet to 25 feet. The attorney who drafted the prior amendment prepared a correcting amendment, but the board declined to sign it. The homeowners then called a special meeting of the members to try to correct the error. The amendment required the vote of two thirds of the lot owners or 42 of the total 63 owners. At the meeting, 32 ballots were cast and 21 voted in favor of the amendment. The trial court approved the owner’s petition under Civil Code Section 1356, ruling that a majority of the quorum of the owners was sufficient to empower the court to reduce the cc&r amendment requirement.

On appeal, the decision of the trial court was reversed. The appellate court interpreted Civil Code Section 1365 to require that more than 50% of all of the votes in the association approve the amendment as a minimum jurisdictional requirement for the court to override the supermajority amendment requirement. The court concluded that the California Legislature made a conscious decision to require that at least a bare majority of all the members would be necessary before the court could reduce the voting requirement.

Although the court found that the petition under Civil Code Section 1356 had to be denied, it specifically noted that the owners may have other remedies to achieve their objectives. It stated that nothing in the opinion would hamper the owner's ongoing efforts to correct the "scrivener’s error".