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August 20, 2010


  WHY DO BOARDS HIDE... AND WHAT HAPPENS WHEN THEY DO?

H"ow do you think that we ended up with laws in California that require and define open meetings for HOAs and condo associations, give owners liberal rights of review and inspection of association records, require homeowner forums and internal dispute resolution (so owners can have access to boards), and require liberal annual disclosure of how to get copies of minutes of meetings, financial information, reserves, savings for repairs and replacement of major components, insurance policies, pending/proposed litigation against developers, summaries of alternative and internal dispute resolution procedures and laws and architectural control processes?

It is because of "horror stories" presented to the legislators about "bad boards". The majority of boards are not "bad boards", but many do "hide". I use the term loosely to encompass lots of things such as having meetings that are non-compliant with the Davis Stirling Act and refusing legally required access to association records requests for various reasons. Many boards use email way too liberally to discuss business and come to conclusions without the benefit discussion at an open meeting carried out in the presence of owners who want to attend and see what is happening. In my experience, the concerns owners are most vehement about are less about making poor decisions than "hiding" those decisions from the membership. When attending meetings at associations where boards are called upon to defend proposals dealing with "big ticket" items like updating and restatement of governing documents and there are vocal critics, the one common thread that shows up is that unhappy owners tend to get the strongest following when the board was not good about involving the members and building consensus. If it could be established that the board actually hid information, then the unhappy owners could sometimes get enough support for a "revolt" of some kind, maybe even recall of the board.

This is a really important topic because if/when boards actually do "hide", or "fail to disclose" information that the owners would find topical and critical to their own decisions about their property, the directors can lose important legal protections and can be subjected to fines and reimbursement of losses to owners. Directors are fiduciaries, meaning they are entrusted to protect the assets of the association members. When one is charged with that kind of responsibility, keeping secrets from the members can lead to legal and political ramifications. If any director is found to be intentionally hiding secrets or defrauding owners, that individual can lose the "legal insulation" offered by Civil Code Section 1365.7 and Corporations Code Section 7231 to protect volunteer directors that act in good faith.

7231 says: "(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances."

1365.7 says: "(a) A volunteer officer or director of an association which manages a CID that is exclusively residential shall not be personally liable in excess of association insurance coverage (as specified in (4) below) to any person who suffers bodily injury, emotional distress, wrongful death or property damage or loss as a result of a negligent act or omission (failure to act), so long as all the criteria below are met:  

    (1) The act or omission was performed within the scope of the director's or officer's association duties;

    (2)The act or omission was performed in good faith;

    (3) The act or omission was not wanton, willful, or grossly negligent.

    (4) The association maintained and had in effect at the time the act or omission occurred and at the time the claim is made one or more policies of insurance providing coverage for general liability and individual liability of officers and directors of the association for negligent acts or omissions with the minimum amounts of coverage of $500,000 if 100 or fewer separate interests and $1,000,000 if more than 100 separate interests."

Directors could also conceivably be held personally liable for the $500 per incident penalties that can be imposed for failure to honor the open meetings requirements of Civil Code Section 1363.05 or records inspection rights granted to owners in Civil Code Section 1365.2. These fines can be imposed by a small claims court judge so an owner does not need an attorney to pursue a cause. If you are on the board and have discovered:
 

  • A potentially rampant termite problem may exist throughout the buildings or decks.

  • A chance that all the pipes in the association may already or soon be springing leaks.

  • That 14 out of 30 owners have reported leaks into their units from roofs or windows.

  • That the painting contractors the board hired painted over serious dry rot without repairs.

  • That the former board, although reporting reserve allocations, was not making the deposits for the past 5 years.

  • An owner is suing the association for discrimination (and there is no insurance coverage).

... or anything like the above, and you start meeting in secret or conducting association business via email, you may be asking for trouble. The only one of the above potentially explosive situations that allows for confidential meetings is the "being sued" situation.

So why do boards hide when these kinds of issues (or much less scary issues even) come up?

ABUSIVE OWNERS. Some boards have to deal with abusive or outspoken owners. There is a difference between inquisitive and pesky behavior, and abuse. When board meetings turn into a circus or boxing ring and can't get off the ground because of owners coming in and threatening the directors, some see the choices as being simple ­ get off the board or go into hiding to make decisions, or don't have "meetings". But there are ways to deal with abusive owners. Here are a few things you can try. There are no guarantees any of these will work, but I often suggest boards at least make an effort before choosing the most drastic (listed in priority from least to most).

Adopt a Meetings Policy: Most people like order and having a meetings policy which sets forth the order of the meetings including time for homeowner forum and order of business often helps. And listing the order of what will happen if there are disruptions gives the board and attendees an outline of what to expect/do when an interruption, or continued interruptions arise. When someone attempts to violate the policy, sometimes even the "peers" in the group will get on the person. And, if there is disciplinary action for malfeasance included in the policy, people can see there will be consequences for bad behavior. One has to consult the association governing documents for the authority and types of disciplinary action that can be imposed. They might include suspension of rights (which might come in handy for meetings), fines, reimbursement assessments (which might come in handy for the next remedy), etc.

Use Sergeant-At-Arms/ Robert's Rules for Ejections:  Honestly, I would not recommend bodily ejecting someone who is disruptive because engaging in physical altercations rarely ends well. I would be more likely to suggest keeping a cell phone at the board table and threatening to (this has worked for some boards) or calling the police if someone becomes threatening or refuses to leave. In some cases I might even recommend having two burley (but friendly) male owners stand by the door or a security officer present for meetings. It is conceivable the presence alone might act as a deterrent. I know that when I am invited to attend association meetings, trouble-makers tend to tone down their behavior.

Use of Video or Audio Equipment as A Deterrent to Embarrassing Behavior. I have recommended that a board try this: set up a video camera on a tripod, and announce to the members [you could even say that because of disruptions at prior meetings], the board has adopted a policy to videotape meetings, [and you could add, or not, these words: "and intends to use the videotaping as evidence if it becomes necessary to seek legal assistance to handle disruptive behavior".]  I think the best policy is to erase the tape after the meeting if it is not necessary to use the tape as evidence so that there are not any issues arising about who can see the tape, if it has to be saved and for how long, what if someone wants a duplicate copy, etc. In fact, I have told board members and managers that even if they forget to put a tape in or turn the camera on, just the fact that it is up there pointed out at the audience might make a difference by discouraging bad behavior. Sometimes this works!

Closing A Meeting And Reopening An Emergency Meeting (Behind Locked or Closed Doors):  This is a desperate remedy ­ but perhaps justifiable if it is simply not possible to get necessary business done because of disruptions by attendees who will not relent. The meeting could be adjourned, the President or any two board members (or whomever the documents say can call meetings) could give notice to the other board members and call an immediate emergency meeting. I am not above suggesting that the board lock up, head on down to somewhere else, or reconvene a telephone conference call if there is business that has to be done. This is a bold move and not something a board should consider doing without consulting the association's legal counsel because I am not sure all attorneys would agree. However, notice to owners is not required for emergency meetings. There is nothing in the open meetings law that prevents owners from attending them, but if an owner does not know about the meeting they won't be there disrupting it. I would never suggest this course of action unless there were "disrupters" that won't allow the board to get through important business. And, a perhaps a safer alternative is to call a meeting and have the association's legal counsel present to discuss legal remedies and how to get the business done that needs attention.

Lawsuit Seeking Injunction: Some boards have had to resort to seeking a court injunction barring certain individuals. This would be a last resort. It is costly and sometimes a board has trouble with proof. Some judges assume that a board ought to be able to handle a difficult owner with the right structure to meetings.

[This one is optional, and I hope no one is offended.] Prayer: You might think this odd, but this method worked for me once in a very difficult meeting. I was asked to attend the board meeting ­ the board was trying to get some important business done and had had to adjourn two meetings already because of disruptions. All the above remedies except litigation had been tried including the video camera. The two bothersome owners had no shame and didn't care of they were sued. They were sitting in the front row heckling as usual, and neither the board nor I were having much luck getting them to sit down and shut up (I don't like that word but it is appropriate here). The meeting was in the Pleasanton library. Saying a short prayer was a knee-jerk reaction to the situation. Lord [I said in my mind], what can be done to help this board get through this?

A minute later the librarian came into the room and reported that some vehicles had been broken into in the parking lot and the police had arrived and wanted to speak with the vehicle owners. There was a black Mercedes and a black BMW with the doors open and items including empty computer bags strewn on the ground."

The two troublemakers up and left the room at a run. And I quietly thought: Thank you.

FEAR OF LETTING OWNERS IN ON THE TRUTH ­ What drives fear? Inability to admit human error? Embarrassment? Fear of being sued? Fear of being seen as weak, stupid, helpless, ineffective, defenseless? Fear of causing distress to others? Seeing people cry? Or of being recalled or ousted from office?

Fear is perhaps the most prevalent reason boards go into "hiding" and conduct business in a secretive way. They have discovered a big problem and do not know how to address it rationally. They have no training for this. They do not want to trigger a lot of questions for which they have no answers. They do not want to tell owners. Perhaps they think they can solve the problem without telling anyone. Maybe they don't want to spark panic or recall petition. These are serious problems, but not as seriously deceitful as wanting to "get out of 'Dodge" before all heck breaks loose." Some boards do that too.

One of the biggest mysteries to me is why boards think it better to bear the entire burden of a problem by keeping all the concern to themselves? Why not share the load (and thereby lighten it)? Why do they wait to make any announcement about the discovery of problems until the sky "is" actually "falling in"? It seems to me the crowning blow will be diffused to some degree if people see it coming. The owners can better plan for how to cushion the blow if they know it is coming. Sometimes they can provide important feedback that the board needs to have to fully assess the situation. And if the board does not make any attempt to build consensus for its "plan", it won't get any. Boards need to inform the owners about progression of and proper attention being given to the serious issues the board is dealing with. If it does not do that it prevents the owners from making  important disclosures when selling his or her property. This often ends up in litigation, and although the new owner can't sue the board, he or she can sue the owner and the owner can sue to the board for failure to disclose any information about a material situation.  

Picture yourself as an owner who believes everything is peachy, only to find out that a problem the board has known about for a year or more has just been disclosed and that it might result in an assessment for which you have no cushion. You're pretty upset given that if you had known it might come, you might have skipped that expensive vacation, new car [payment], the remodel or redecoration project, or waited to sell the unit to avoid having the sale fall through. Multiply that by the number of people in the development.

I can understand fear of being caught and or "called on" for any big mistake, fear of sharing the fact that the association is facing an impending hugely expensive repair or replacement, or that the savings have dried up whatever reason, or the like. When these discoveries are made there is nothing wrong with holding off temporarily in order to consult with the right kinds of experts who have the knowledge to help sort out these situations and offer the right kinds of resolutions and help with the disclosures. There are many potentially exacerbated problems when the situation is "shoved under the rug".  

  • It can grow exponentially and become a much bigger problem.

  • It can lead to political revolt.

  • It can lead to breach of fiduciary duty claims.

  • It can put everyone's investment at risk.
     

NOT WANTING TO BE BOTHERED ­ This is another common problem among boards. Sometimes it comes about because of ego and other times ­ I see this - because a director has given service for 20 years and no one ever showed any interest before. It can be an assumption that no one cares, or an excuse that communicating with owners is an exercise in futility. Sometimes it's a distaste for controversy. "We don't want any petty or needless arguments because that is not going to change anything."  Sometimes it's "that person has always been nosy and pushy and there's no reason to jump" just because they say so. Sometimes a board will say to me: "We have done it this way for 10 years and we are not going to change because of some stupid law put into place by some stupid legislator who did not understand how complicated he or she has made it for the volunteers like us who are doing our best."

Touch`e.

While the feelings may be justifiable, the law says: (1) open up the meetings, (2) open up the books, and (3) tell people when there is a big special assessment coming. Again, how did we get here? Through laws passed by legislators responding to constituents who claimed their boards were trying to hide information.

To the legislators, HOAs and condo associations are like governmental agencies (sometimes referred to as mini-governments) and should be subject to public laws like the Brown Act and laws requiring accountability and disclosures which make government transactions more transparent. HOA attorneys argue HOAs are more like GM and other large corporations who don't have to account in detail to the "minion" shareholders. The legislators don't buy it. They often feel the need to micromanage associations through the passage of laws. Legislators demand that boards conduct business appropriately and refrain from hiding important information from owners. There is a happy medium between the "mini-government" and the "corporate world" approaches as to what should be open and what should be handled in confidence.

NOT WANTING TO SPEND MONEY ­ There are directors who ran on a campaign promise to "lower dues" or hold down costs. This can be difficult when at the same time the California legislators are imposing more and more requirements, the state is losing money and localities are grabbing for it (passing back enforcement and maintenance obligations), and the law requires more detailed disclosures and more service-driven costs. Budgets are going up because of cost and assessments increases due to hefty losses of income caused by owners "walking away" and bank foreclosures. Most boards are loathe to "waste" money on dealing with one owner who wants to see everything!. However, compliance with the law is not discretionary, it is mandatory! The records inspection statute, Civil Code Section 1365.2 is an example of how legislation can affect association coffers. It allows owners to review and copy such things as:  

(A)   "Any financial document required to be provided to a member in Section 1365.

(B)   Any financial document or statement required to be provided in Section 1368.

(C)  Interim unaudited financial statements, periodic or as compiled, containing any of the following:

(i)         Balance sheet.
(ii)        Income and expense statement.
(iii)       Budget comparison.
(iv)       General ledger. A "general ledger" is a report that shows all transactions that occurred in an association account over a specified period of time."

And many other detailed records called "enhanced records", even some that would have to be redacted to prevent disclosure of information that could lead to identity theft, without allowing for full cost return on administration of these requests and redaction should the records request be extensive.  

As for the meetings situation, some boards have no on site options other than board members' homes and they do not want to spend association money to rent a room at the local library or civic center. Thus, they don't really want to open up the meetings (and their homes) to people they don't care for. Some store association records in their garages and don't want to pay for storage space elsewhere. Thus they do not want to invite dissatisfied or distrustful owners into their garages to review records. I am not condoning this behavior but it happens a lot, especially in those homeowner associations that are small and can't afford to hire professional managers.

So what is the answer for the board members? Don't hide! Learn the law or hire help to guide the board on the legal requirements (preferably from management or legal professionals who have experience for a plan ­ and/or assistance in how to get owner support or a special assessment to afford the help). Follow the law or suffer the consequences, some of which can be very serious. Be more transparent and let the owners in on problems that need resolution. OR, as some directors have proposed - Resign and let the association fall to pieces? Not the best option. Your investment is at stake and so are you if you jump a sinking ship. Bury your head in the sand? Not a good idea ­ it leaves your derriere exposed.

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.

  copyright 2011, Beth Grimm, all rights reserved.

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.




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