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E-DAY IS HERE ...
Do You Want To Know Why There is So Much Consternation
Over The New HOA Elections Law?
(If you don't want to know, don't read this!)

Note: copyright 2006, Beth A. Grimm, PLC, all rights reserved (permission is required to reprint this article, unless credit is given to Beth A. Grimm, PLC in the reprinted version).

I thought it might be helpful for people to understand why it is so difficult to agree on the practical application and processes of Civil Code Section 1363.03 and amendments proposed by SB 1560. And why there are differing interpretations for writing elections rules under the law that took effect July 1, 2006, which should be dubbed "E-Day.

The following will help explain why the magnitude of issues surrounding the new "election reform law keeps expanding instead of contracting. There are so many statutes affected by this new law. And there are so many governing document provisions that need to be factored in. As to both, they are either (1) no longer of any effect, (2) left partially effective, or (3) their continuing effect on Association elections is left to different interpretations and confusion. The statutes described below are affected one way or another by Civil Code Sections 1363.03, .04, and .09 (the new law) because they either conflict with the new law or only partially conflict with the new law. I will include some dialogue about how governing document provisions might affect this mix. And conflicts are generally to be resolved in favor of the new law which says that if there is a conflict with the NonProfit Mutual Benefit Corporations (NPMBC) Code, or the governing documents, the new law controls. Most of the HOAs in California are NPMBCs and that is the body of law where most of the conflicts exist. (See Corporations Code Sections 7110 and following). The new law does not mention what to do with conflicts in the Davis Stirling Act or the Public Benefit NonProfit Corporations Code (PBNPC) and some HOAs fall under the PBNPC. However, for each of the below statutes listed except for the Civil Code Section first described, there is a corresponding code section regulating the Public Benefit NonProfit Corporation HOAs (which statutes commence at Corporations Code 5110), and those conflicts will probably resolve similarly to the discussions below. As to these and the conflicts generally with existing documents, only time will tell how it all will shake down in practices).

Civil Code Section 1366 in the Davis Stirling Act sets forth the law on assessments increases. If a regular assessment is to be increased more than 20% (in the aggregate) from the prior year, a vote of the members must be taken. If a Board wants to impose a special assessment of more than 5% of the budgeted gross expenses for the fiscal year, a vote of the members must be taken. In both cases, a majority of a quorum of members must approve the increases. (The statute sets the quorum at more than half of the members). If the Board fails to get the budget out within the time specified by another statute (Civil Code Section 1365), a vote of the members must be taken to approve the assessment for the next fiscal year regardless of the percentage of an increase.

In all of these cases where an election of the members is required the new elections law must be followed, but the new elections law does not specifically refer to this or the timing statute. So one has to infer that it's (the new law) applicability to voting on "assessments" is based not on all assessment decisions, just those that are addressed in Civil Code Section 1366.

And here is another glitch. Civil Code Section 1366 says an election on assessments matters (when required) is to be conducted at a meeting or using Corporations Code Section 7513 written ballot processes. Those requirements are clearly null and void as to voting on assessments after July 1, 2006. So this one seems fairly easy to resolve. (I wish they all were.)

Corporations Code Section 7510 dictates the meeting requirements for a NPMBC HOA. There are many, not the least of which is that a corporation shall have at least an annual meeting for conducting elections, and if the corporation HOA does not hold the meeting, the members may seek a court order that one be held. The statute says "Meetings of members may be held at a place within or without this state as may be stated in or fixed in accordance with the bylaws. ... A regular meeting of members shall be held on a date and time, and with the frequency stated in or fixed in accordance with the bylaws, but in any event in each year in which directors are to be elected at that meeting for the purpose of conducting such election, and to transact any other proper business which may be brought before the meeting. ... If a corporation with members is required by subdivision (b) to hold a regular meeting and fails to hold the regular meeting for a period of 60 days after the date designated therefore or, if no date has been designated, for a period of 15 months after the formation of the corporation or after its last regular meeting, or if the corporation fails to hold a written ballot for a period of 60 days after the date designated therefore, then the superior court of the proper county may summarily order the meeting to be held or the ballot to be conducted upon the application of a member or the Attorney General, after notice to the corporation giving it an opportunity to be heard. ... The votes represented, either in person (or, if proxies are allowed, by proxy), at a meeting called or by written ballot ordered pursuant to subdivision (c), and entitled to be cast on the business to be transacted shall constitute a quorum, notwithstanding any provision of the articles or bylaws or in this part to the contrary. The court may issue such orders as may be appropriate including, without limitation, orders designating the time and place of the meeting, the record date for determination of members entitled to vote, and the form of notice of the meeting. Special meetings of members for any lawful purpose may be called by the board, the chairman of the board, the president, or such other persons, if any, as are specified in the bylaws. In addition, special meetings of members for any lawful purpose may be called by 5 percent or more of the members"

The new law does not provide for voting at a meeting. It provides for a mail election. The clean up of the original bill (original: SB 61, Cleanup: SB 1560), says:"(k) Except for the meeting to count the votes required in subdivision (f), an election may be conducted entirely by mail unless otherwise specified in the governing documents." (My emphasis) So, it appears that Corporations Code Section 7510 is no longer controlling. And when governing documents state that there is an annual meeting for elections, Boards need to figure out how to integrate the balloting with the annual meeting. It takes thought and planning as to how the process of voting under the new law and voting at a meeting are to be "married". How to do that is not explained in any of the statutes. So one can expect challenges under the new laws to almost any of the choices. However, since this is left unsettled, almost any reasonable combination of events should be acceptable (ballots sent out before the meeting, ballots given out to attendees and mailed to absentees and counted after the meeting, ballots sent out after the meeting and counted at a board meeting, etc.).

Corporations Code Section 7512 sets quorum requirements at 33 1/3% for associations that do not have quorum requirements in their governing documents. Under the SB 1560 the quorum requirement is stated as follows: A quorum shall be required only if so stated in the governing documents of the association or other provisions of law." This and Civil Code Section 1366 are both other provisions of law. So, practically, 1366 would logically govern the quorum requirement for assessment elections since it relates specifically to assessments (assuming it does not fall because of conflicts over the process with the new elections law), and 7512 should govern the quorum requirement for other elections where a quorum needs to be established. What is confusing is that associations are being advised by some to simply drop the quorum requirements altogether, but then 7512 would kick in and if they were trying to accomplish getting rid of any quorum requirement for the directors election, they would fail. But you have to be a lawyer to recognize this and make the leap in logic.

Corporations Code Section 7513 provides a means for associations to conduct membership voting without a meeting by written ballot. It allows for any election to be done by written ballot that could be done at a meeting unless the governing documents prohibit it. Civil Code Section 1363.03 provides for written ballot, but does not contain the same requirements as Corporations Code Section 7513 because it is secret and 7513 is not. So 7513 is overridden at least as to elections subject to the new law, but the question remains as to whether it stands for other elections. It makes sense that it could be used for other elections (such as the IRS election, a name change, or incorporation of an unincorporated association for an example), but it is probably better to proceed under the new law with any mail election that an Association is going to do. The new law does not really resolve the question as to whether other subjects than those mentioned can be voted under the new system but I think it is fair to assume that would be a choice open to a Board.

Corporations Code Section 7514 sets forth the requirements for a proxy or written ballot. The requirements differ from 1363.03 for the ballot because on a 7513 ballot, choices are specified and the ballot is usually signed by the owner(s). Under Civil Code Section 1363.03, the new law, proxies become confusing. There are now different requirements for the "form" of proxy than what is required to be on a written ballot or proxy under the Corporations Code. Questions are sure to arise in any event, if an owner brings a proxy to a meeting that satisfies all the requirements of 7514, but does not have the tear off page required by CC 1363.03. And the clean up legislation says that Associations are not required to distribute proxies which causes some practitioners, board members, and managers to interpret the law to mean that the Board does not have to accept proxies. So, will they be accepted? Inspectors will have to decide at the meeting or the Board will have to provide an instruction ahead of time and there is chance of challenge no matter which decision is made. Some attorneys are saying no because of technicalities and others are saying that in favor of attempting to make sure that every vote counts, such an error would not result in a voided proxy. The new definition given to a proxy is very simple and if the proxy qualifies under it, it should be accepted, but there might be intervening factors or concerns that need to be addressed. The inspectors should be making the decisions on these, not management or the association's attorney, especially when the decision could control the outcome of the election.

Corporations Code Sections 7517 provides guidance for reviewing ballots, in determining what to do about situations where the name of the person returning or signing the ballot does not correspond to the association records. The new law does not have any provisions so it would appear that this statute still stands with regard to HOA elections. It is a good guide for determining how to verify whether the person voted is authorized to vote on behalf of the owner or is considered to be the owner. It would serve as a good guide for Boards and for Inspectors as it clarifies whose votes can be accepted when an individual is voting on behalf of a trust, or a business or other entity. There is a long list of "what ifs in the statute. Corporations Code Section 7520 provides for nomination and election procedures in corporations and says that there must be available to the members reasonable nomination and election procedures given the nature, size, and operations of the Corporation. This section leaves it up to the superior court of the proper county to enforce the provisions of that section. The new law allows members to bring actions in Small Claims Court. This is another source of confusion and conflict to be resolved, which court will it be?

Corporations Code Section 7521 pertaining to associations with 500 or more members provides for eligibility and methods of nomination of directors. That section only allows the members that are qualified to serve to be nominated. A qualified member may get nominated through a petition signed by only a very small percentage of owners -- 2% -- or at a meeting if there is one, by any member present in person or by proxy. The new elections procedures allow any member, qualified or not, to nominate themselves which creates a specific legal issue boards will have to resolve at some point during the election. This statute conflicts with the new law so a question arises as to how qualifications are affected - mostly relating to whether and how they can be enforced. The idea that a member who is not "qualified to serve" can nominate themselves is problematic. (Examples a "qualification" that might be found in governing documents could be "good standing, which often equates to being paid current with assessments and not in violation of the governing documents.) The question arises as to when exactly the Board may remove the name from the nominees, or is it better to just not count votes for an unqualified candidate, or is it better for the Board to declare the position vacated after the election because of the lack of qualification, and then appoint a Director to fill out that "unqualified" Director's term?

Corporations Code Section 7524 deals with mailing candidate selection materials and the payment of costs. It provides alternatives for boards to offer to send out candidate materials, at the members' cost, in lieu of giving a mailing list providing names and addresses of all of the members. The new elections law does not provide this option. It does require equal access to association resources. It is silent on mailings and rights to obtain the members' names and addresses. There is other new law taking effect July 1 that deals with obtaining membership lists. However, a fair interpretation of the new elections law which ensures that candidates will have equal opportunity to communicate their views related to the election is that they will all be given some forum, either at a meeting, on a website, by letter or otherwise. How much opportunity is up for debate.

Corporations Code Section 7525 provides an incorporated HOA with exemption from liability for content of candidates' material. The new 1363.03 allows the Association to send a statement with candidate's materials stating that it is not responsible for the content, but the law's author put in and then deleted from the final cleanup legislation a sentence that would have provided immunity to boards and the association and its agents for dissemination of the materials of candidates. It would be nice to be able to hang onto the protection in 7525 but that is also up for debate. The statute does not align with the new law. But arguably it does not conflict either since the new law is silent on the immunity language.

Corporations Code Section 7527 sets a statute of limitations on actions as to the validity of an election (9 months to challenge), including appointment of or removal of a director. CC Section 1363.09 provides a one-year statute of limitation for association elections. It will be up to attorneys to argue about which controls, because Civil Code Section 1363.09 does not contain the same language as 1363.03 about which law controls. And after the cleanup legislation the Inspectors are supposed to keep the election materials for 9 months (pointing to this specific section) or designate a safe place, indicating the author might have been attempting to accept arguments that the time of challenge should not conflict with 7527. Who knows how this will shake down.

Corporations Code Section 7611 provides a means for an association to set a record date upon which votes can be counted. This is meaningful because if a property transfers hands during the process of a mail in ballot election, there needs to be a certain date upon which the board can determine who is entitled to vote, the prior owner or the buyer. CC 1363.03 simply provides for identifying the "close of polls". That does not address the record date. However, again, since the new law is silent on record date, this statute does not conflict with it and hence, is probably not affected or invalidated. A Board will have to provide this information to the Inspector(s) of election however, because a buyer or seller would have to know the cutoff date for voting by the owner of any property changing hands during the election.

Corporations Code Section 7613 explains proxy use. Again, the use of proxies is confusing to most. CC 1363.03 sets an additional standard for proxies requiring a tear off page but does not define its use or how it fits with the secret ballot process. Association representatives (since they do the check in at the meetings) and Inspectors of election that receive a proxies in addition to the mail ballots provided for in 1363.03 are going to have to determine whether a proxy that qualifies under the Corporations Code Section 7613 but not under CC 1363.03 should even be accepted. This remains an unresolved issue. Some attorneys say yes, others say no.

Corporations Code Sections 7614 provides instructions for inspectors of election. They do not align seamlessly with Civil Code section 1363.03 requirements for inspections of elections, and this could cause confusion, but 1306.03 will prevail on this. Civil Code Section 7614 provides that the Inspectors' decision is prima facie evidence of the outcome of the election, etc. It establishes a standard that is just slightly different than CC 1363.03 but that leaves open the legal argument over whether parts of it can still be cited as authority.

Corporations Code Section 7615 provides for cumulative voting in corporations whose articles or bylaws authorize it. CC 1363.03 does not address cumulative voting. SB 1560 requires associations to explain and use the cumulative voting option on the secret ballot, if the HOA bylaws allow for cumulative voting. Some attorneys do that, and others believe it does not have to be explained or offered unless an Owner announces they want to cumulate their votes before the election, as is the manner of implementation by the Corporations Code. Clearly, if it is not announced and explained ahead of time, all those who mail in ballots and did not have the opportunity to cumulate their votes will be at a distinct disadvantage if owners may also attend the annual meeting where the door is open to cumulative voting being announced and used. So not explaining it leaves the door open to a challenge based on failure to provide an owner the opportunity to cumulate votes. Legal arguments may arise as to how to resolve the distinctions between the two statutes.

Corporations Code Section 7616 provides for a judicial determination of the validity of an election or appointment of a director. That statute provides for superior court to determine if an election is fair or reasonable, and whether substantial compliance mitigates the need to call a new election. There is no "substantial compliance" language in the new statutes. The new elections law in Section 1363.09 provides that "...a member of an association may bring a civil action for declaratory or equitable relief for a violation of this article by an association of which he or she is a member, including, but not limited to, injunctive relief, restitution, or a combination thereof, within one year of the date the cause of action accrues. Upon a finding that the election procedures of this article, or the adoption of and adherence to rules provided by Article 4 (commencing with Section 1357.100) of Chapter 2, were not followed, a court may void any results of the election. ... A member who prevails in a civil action to enforce his or her rights pursuant to this article shall be entitled to reasonable attorney's fees and court costs, and the court may impose a civil penalty of up to five hundred dollars ($500) for each violation, except that each identical violation shall be subject to only one penalty if the violation affects each member of the association equally. A prevailing association shall not recover any costs, unless the court finds the action to be frivolous, unreasonable, or without foundation. ... A cause of action under Section 1363.03 with respect to access to association resources by a candidate or member advocating a point of view, the receipt of a ballot by a member, or the counting, tabulation, or reporting of, or access to, ballots for inspection and review after tabulation may be brought in small claims court if the amount of the demand does not exceed the jurisdiction of that court."

This explanation of remedies is complicated yet loose enough to challenge or empower a small claims court judge, and give the impression that an election could be overturned for a minor technical glitch upon a $25 filing fee. And clearly it is anti-HOA given that an owner can recover monetary penalties and attorneys fees, and an HOA cannot, unless it can prove that the action is frivolous, unreasonable or without foundation. This will be a hard test to overcome.

Corporations Code Sections 7152 and 7153 provide for delegate voting. Luckily, the cleanup legislation eliminated delegate voting from the requirements of Civil Code Section 1363.03.

This concludes the discussion on statutes and the issues that come up for HOAs. But that is not the end of the inquiry. There are general issues as well.

These are common governing document issues or processes, and just a sampling of some of the common industry practices and problems that Civil Code section 1363.03 confuses:

Removal of directors. Removal of directors might be addressed in the governing documents of the association, and it is also addressed in the Corporations Code at sections at 7222 and 7224. Civil Code section 1363.03 does include removal of Directors in its provisions. This means that there needs to be one secret double envelope balloting process for the recall election and one secret double envelope voting process for the election of directors to fill the vacant position(s), so there must be a 30 day period in between if the recall measure is successful, before the replacement Director(s) can be elected. A meeting could proceed with one ballot containing both measures but it is all but impossible to determine all potential candidates to be named "in case" a Director or Director(s) are recalled. And sending the ballot out ahead of the meeting to be returned either by mail (without any indication as to whether the second measure would even be relevant) and collecting ballots at a meeting as well confuses members as to the right time to submit their ballot. Recall elections are thoroughly confused and complicated by this new elections law and no matter which side you are on, there are outstanding potential challenges for any process.

"Elections" in the face of apathy. Apathy is a prevalent problem in HOAs. Getting owners to vote in any election is commonly very difficult. It is hard to find people to serve. It is going to be very difficult for many associations to get enough names on the secret ballot to constitute any kind of a contest. Yet, the new elections law does not provide a mechanism for a Board to determine the election by acclamation (for lack of candidates) or board appointment (for lack of a quorum). The secret ballot system deters meeting participation and many associations rely on the meeting to recruit Directors. So, in a situation where a Board cannot get sufficient names added to the ballot to provide for any contest of the election, what are they to do? CC 1363.03 does not address this dilemma. If they forego sending out the ballot because there were no candidates, or not enough candidates to fill the positions, then they are in violation of the law but sending it out is completely futile and a waste of funds. Either way, an association could end up in court.

Elimination of the Annual or Special Meetings: Many governing documents have provisions allowing for nominations from the floor, and provide that elections will be conducted at the annual meeting. If an association follows the advice of some attorneys and amends the documents to forego membership meetings, will the long-term result be the downfall of many associations? If they cannot get people to come to meetings, interest and participation is certainly going to wane. This is a serious threat to the very model of how associations in California are being managed and administered by volunteer boards.

Establishing a quorum for a meeting. Recognition must be given to the fact that failure to establish a quorum could invalidate any action taken at a meeting of an association, including the Board election. Under the secret ballot system proposed by Civil Code Section 1363.03, and the dilemma constituted by introducing language that either requires introducing two different methods of voting to members, or discourages use of proxies, Associations and the members will have some trouble understanding how to get to a quorum. Proxies may remain a necessary vehicle. Maybe the mail ballot, since it counts toward the quorum requirements, will suffice. Only time and experiences will tell.

You may all have to stumble through the first election under this new system to determine what the best method of using it will be.

copyright 2006, Beth Grimm, all rights reserved

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