DRUNK BOARD MEMBER

DRUNK BOARD MEMBER

QUESTION: What do you do about a board member who shows up drunk at meetings?

ANSWER: To avoid personal liability for their actions/decisions, directors must perform their fiduciary duties "with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." (Business Judgment Rule.) That standard is hard to meet when a board member is DUI (Director Under the Influence).
Reckless Indifference. As with drunk drivers, a drunk director is not competent to get behind the wheel. Their impaired judgment is self-induced and could be deemed reckless indifference or deliberate disregard of their obligations to the membership and an abdication of their duties as a director. Such behavior is specifically excluded from protection by Corporations Code §204(a)(10)(iv)&(v), i.e., it exposes the director to personal liability.

Fellow Directors. What impact does it have on fellow directors? The worst case scenario is the drunk director gets into a fight with and seriously injures a homeowner at a board meeting. The injured owner then sues the board for not previously taking action against the inebriated director. While the likelihood of success against all directors would depend upon foreseeability of the impaired director's actions, the lawsuit would certainly succeed against the problem director. The plaintiff would also prevail against the association since the director's actions occurred while in his official capacity.

Censure. If the board does nothing, it has the effect of condoning the director's bad behavior--something that would certainly be used against the board at the time of trial. To protect themselves and the association, fellow directors should warn the impaired director to go home and sleep it off and never again appear at a meeting intoxicated. If the bad behavior continues, the board should censure the director. 

Removal from Office. If the director is an officer (president, secretary, treasurer), he can be removed from office by fellow directors. Unseating him from the board however, is not an option unless the bylaws specifically authorize it. That is something normally reserved for the membership via a recall.

Ethics Policy. If boards have not already done so, they should adopt a "Code of Conduct" or "Ethics Policy" to address these kinds of situations. 

NOTE: If you adopt an ethics policy, be sure to include an exception that allows directors to get drunk after meetings where they have to deal with particularly difficult homeowners.

DELINQUENT LANDLORD

DELINQUENT LANDLORD

QUESTION: Our board is frustrated with delinquent homeowners who collect rent on their units but refuse to pay their dues. Is there anything we can do?

ANSWER: There is a very effective provision I added to CC&Rs 20 years ago to address this issue. It's called a supplemental lease agreement or lease addendum.

Lease Terms. Whenever an owner leases his unit, both the owner and the tenant are required to sign a lease addendum supplied by the association that requires, among other things, (i) the lease be for the entire unit; (ii) no assignments or subleases are allowed; (iii) the lease is for not less than one year; (iv) tenant agrees to comply with the association’s governing documents and be subject to the its disciplinary procedures; (vi) owner assigns rents from his unit to the association in the event he becomes delinquent; and (vii) tenant agrees to pay the owner's assessments should he become delinquent. 

Effective Tool. The agreement provides a tool that associations need to hold both the homeowner and the tenant accountable since they are parties with the association to the agreement. When I go into court with CC&Rs and a signed agreement, neither the owner nor the tenant have a defense. Normally, a demand letter from my office with the relevant documents enclosed and a threat of litigation is sufficient to get prompt payment of the delinquent assessments. Only once have I had to go into court to enforce the lease addendum.

Rules Enforcement. The addendum is also effective in bringing a wayward tenant into compliance with the rules. Per the signed agreement, the owner and the renter are subject to disciplinary action. Both can be fined and, if necessary, sued. Moreover, the agreement gives the association the power to evict the tenant for violation of the terms of the lease addendum.
RECOMMENDATION: If your association has problems with delinquent landlords and/or problems with rules enforcement involving tenants, a lease addendum may solve both problems. 

CONFLICTING DOCUMENTS ON CUMULATIVE VOTING

CONFLICTING DOCUMENTS ON CUMULATIVE VOTING

QUESTION: Our membership approved revised CC&Rs eliminating cumulative voting but failed to pass a bylaw amendment doing the same. What do we do now?

ANSWER: It depends. Under the new Davis-Stirling document hierarchy, any conflicts between your CC&Rs and your bylaws are settled in favor of your CC&Rs. Accordingly, if your CC&Rs prohibit cumulative voting and your bylaws authorize it, your documents conflict and your CC&Rs prevail. In this scenario, you can drop cumulative voting.

Amendment Language. If, however, your CC&R amendment simply deleted references to cumulative voting so your CC&Rs are now silent on the issue but your bylaws authorize cumulative voting, there is no conflict between the documents and your bylaws prevail. In this scenario, you're stuck with cumulative voting until you successfully amend your bylaws to drop cumulative voting or amend your CC&Rs to prohibit cumulative voting.

PAYMENT PRIORITY

QUESTION: We have many HOA boards who are frustrated at seeing unpaid late fees on their aged receivables report. Recently at an industry event, we were told that if an association changes its delinquency policy to say so, boards can apply owner payments to outstanding late fees before applying the payment to outstanding assessments. Is that true?

ANSWER: No it's not true. It doesn't matter if an association's CC&Rs, bylaws and collection policy all say you can apply payments to late fees first and then principal. The law states:

Any payments made by the owner of a separate interest… shall first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney's fees, late charges, or interest. (Civ Code 5655(a).)

Unless a statute defers to an association's governing documents, the statute prevails. In this case, the statute does not defer and payments must first go to assessments. To remedy the problem of unpaid late fees, your board can sue a recalcitrant member in small claims court for the unpaid late fees. Oftentimes owners will immediately pay rather than go through the hassle of appearing in court and risk a judgment against them.

NO CANDIDATES

QUESTION: We sent out a call for candidates for our annual election and there were no volunteers. If the law says we have to hold an election each year, how do we have one without candidates?

ANSWER: HOA governing documents normally call for an annual meeting at which, among other things, directors are elected. Even if no one shows up, holding a meeting satisfies Corporations Code §7510(b) and your governing documents.

Floor Nominations. If your election rules allow floor nominations and if someone shows up at the meeting and if that person is willing to nominate himself from the floor, you can fill an empty seat. That assumes you achieve quorum and it further assumes the person has not already voted for someone else (once cast, ballots are irrevocable).

No Annual Meetings. I know some boards dispense with annual meetings altogether and nobody cares...until someone is unhappy with a board decision and sues alleging the board's decision was ultra vires because no election was held. While plaintiff's position is contrary to statute (directors remains on the board until successors have been elected; Corp. Code §7220(b)), the association must defend against the lawsuit.

RECOMMENDATION. If apathy is running rampant in the community, you probably won't make quorum so you can't elect a floor candidate even if you shanghaied someone, dragged them to the meeting and raised their hand while they were still drugged. What you can do, however, is appoint them to the board. Once the drug wears off, the deed will have been done.