By Jeffrey A. Barnett, Esq.
Why The Members Called for Dissolution
The angry and dispirited homeowners at the annual meeting could only agree on one thing. The association should be dissolved. The board members had resigned after endless disputes over the funding of repairs, special assessments, collections and intra-Association litigation. Only a few homeowners cared enough to vote and to attend the membership meetings
By dissolving the corporation, the management, legal and accounting expenses could be eliminated together with the state and federal tax obligations and government compliance issues.
The homeowners formed a study group to research the feasibility of dissolving the corporation. They consulted legal experts and reached the following conclusions.
Because all of the homes had been sold by the developer, the Department of Real Estate did not have the right to stop dissolution.
The board of directors must adopt a resolution to dissolve the corporation. If less than a quorum, the resolution must be unanimous. It would be necessary to elect or appoint directors to the board so that this resolution can be adopted. Corporations Code Sections 7911(a)(1) and 8610(c).
The cc&rs stated that the city had to approve any amendments to the cc&rs that related to the maintenance duties of the association. Dissolving the corporation would prevent the association from performing its duties. The city planning department was having the city attorney consider the issue, but felt it was unlikely that the city would approve dissolution. The city has the right to enforce the cc&rs through a lawsuit.
The cc&rs also prohibit dissolution of the association without the approval of two thirds of the first trust deed holders. The articles of incorporation and Corporations Code Section 8724 require that 100% of the members approve dissolution. These approvals are theoretically possible, but will be very difficult to achieve as a practical matter. The Superior Court might reduce these voting requirements, but a petition would need to be filed under Corporations Code Section 7515(a) and Civil Code Section 1356..
If these challenges could be overcome, the dissolution process will proceed. The directors reached the following conclusions about the process:
- An accountant knowledgeable about associations will need to provide advice about the tax consequences of the dissolution.
- It will be necessary to give formal notice of the dissolution to the IRS.
- Corporate assets will need to be sold, and can be sold without a vote of the membership. Corporations Code Section 8710(g). Since the subdivision is a planned development and the Association owns the common area, this land will need to be sold.
- All of the debts and liabilities of the Association will need to be paid. Corporations Code Sections 8713-8714.
- Creditors of the Association must receive notice of the dissolution. Corporations Code Section 8618.
- The Association, five percent or more of the members, or three or more creditors of the Association may compel the assistance of the Superior Court in the dissolution process.
- A receiver can be appointed by the Court to assist the dissolution. Code of Civil Procedure Sections 566-567 and Corporations Code Section 8513.
The study group concluded that these procedural issues involved in dissolution of the association were manageable. But they found the following practical problems difficult to resolve regarding operation of the subdivision after dissolution:
- Who will control the common area?
- How will the buildings be maintained, repaired, painted and re-roofed without assessment funding and contracts issued through the Association?
- Will lenders fund loans to purchasers and refinance loans if there is no association?
- Will more litigation ensue if neighbors enforce the CC&Rs rather than the Association.
- If an unincorporated association is set up to replace the former corporation, won't the same costs of operation and problems of apathy and dissention exist?
The committee reported back to the members that an alternative to dissolution was the appointment of a receiver by the Superior Court. The Court has the power to appoint a receiver to operate the corporation under certain circumstances. See Code of Civil Procedure Section 564.
The receiver would need to be paid from assessments and may have the power to increase assessments without a vote of the membership. In addition to the fees and costs of the receiver, the Association would incur the expense of accounting and legal fees incurred by the receiver. These charges could be very substantial.
The committee also proposed that certain of the problems in the operation of the Association could be addressed through amendments to the CC&Rs and Bylaws, with Court approval, if necessary. These include reducing the quorum for membership meetings, reducing the size of the Board and increasing the powers of the Board. They concluded that these measures were the most realistic to deal with the political problems of the Association.