FINES ON UNPAID FINES

FINES ON UNPAID FINES

QUESTION: Is it legal to fine someone twice on the same violation if they refuse to pay the first fine and have remedied what the fine was for in the first place?

ANSWER: The imposition of monetary penalties requires due process, which must be done in accordance with the association's published fine policy. I've never seen language in any governing document that allows a board to levy fines on unpaid fines or two fines on a single violation. If your board had a written, published policy that allowed for fines on fines, I suspect a court would find it unreasonable.

Board Options. If an owner refuses to pay a fine, boards have twooptions. The first is to take the person to small claims court for a judgment in the amount of the fine. This approach is not always successful--small claims judges are a bit unpredictable. The secondoption is to hold a hearing and find the person "not in good standing" and suspend their privileges and voting rights until the fines are paid.

RECOMMENDATION: Boards should have their association's legal counsel review their governing documents and advise them on how best to levy and pursue monetary penalties.

RESIGNATIONS
AND APPOINTMENTS

QUESTION: Our board president resigned because he sold his home and moved. He had more than one year remaining on his term. Our treasurer, who is up for election this year, resigned his seat and was appointed by fellow directors to fill the seat vacated by the president and assume the remaining year of his term. Is this allowed?

ANSWER: Yes, it's allowed. The Corporations Code and most bylaws authorize the appointment of replacement directors whenever there is a vacancy on the board. There is nothing illegal or improper when a board appoints an existing director to fill the longer term of a resigning director. Term limits might preclude the appointment depending on how the restriction is worded.

FEEDBACK

Borrowed Reserves #1. Can a board use reserve funds designated for a particular line item in the reserve study for another reserve item if it needs attention immediately? If so, do funds have to be paid back?-Linda D.

RESPONSE: Monies can shift between line items in a reserve account. It is normal to make adjustments from year to year to reallocate funds to cover items that fail prematurely or cost less to repair than was anticipated. For example, if a boiler fails in year eight instead year ten as projected by the reserve study, funds can be shifted from other line items to cover the unexpected early expense. Or, if a pool heater replacement ends up costing half the projected cost, the left-over funds can be assigned to other reserve line items. Such reallocations are not unusual. 

Major Expense. In the example I gave last week, the reserves were wiped out by a large unexpected, unreserved for item. The $400,000 expense I gave was not a minor adjustment--it was a complete depletion of the reserves. The unexpected and unreserved major expense is better addressed through an emergency special assessment. Or, in the alternative, "borrowing" from the reserves and using a combination of regular and special assessments to accelerate replenishment of the funds.

Consequences. An unplanned emptying of the reserve account will clearly have consequences. Per statute, the association will have published a reserve summary that showed $400,000 allocated for plumbing, painting and paving expenses--those expenses do not go away just because a roof emergency intervened. They will hit at some point with no monies to pay for them. Accordingly, the prudent course of action is to replenish the reserve funds. Some reserve specialists have weighed-in on this topic. See their responses below.

Borrowed Reserves #2. We keep track of the major repair and replacement components at the individual component level as part of estimating the overall obligation. But the investment portfolio is handled as a pool of money. There is no “roof” money or “painting” money. It would be like having a bank account for every line item of revenue and expense. What is really going on here is that associations levy assessments sufficient to perform its duties. The annual assessment level is designed to handle the year’s estimated routine operating expenses and to charge current owners a sufficient amount that covers the “annual wearing out cost” of common area major components that the association is contractually (CC&Rs) and legally (California law) obligated to maintain at an known and ascertainable standard. Acquiring and managing the investments is a mutually exclusive process from estimating what money you need to meet current and future cash flow requirements and deciding who pays for what when. It is a more technical conversation, but that is the essence of the matter. -Donald Haney, CPA, MBA, MS(Tax).

Borrowed Reserves #3. Assuming monies are set aside for the items you mentioned, however, for some reason, the roof is not included in the reserve study, and therefore no monies had been set aside for their replacement, the monies in the reserve fund can still be used for replacement of the roof. It’s all one bucket of money and it can be used to replace components the association is obligated to repair, replace, maintain or restore. My rational is: 

1.  Is the component the responsibility of the association?
2.  Is the component in need of replacement? 

Assuming yes to each, why would an HOA have to borrow its own money to replace a component it is responsible to replace? The fact that the component was excluded from the reserve study [error by the preparer or believed to be 30+ remaining life] is irrelevant to the responsibility and needs of the association. The monies are set aside to maintain the facility, the reserve study is simply a tool to help identify and estimate the costs to do so. There will inevitably be costs to maintain a facility that are unforeseen, limiting the HOA’s available resources to the items specifically identified in a reserve study seems imprudent. -Scott Clements, RS, PRA, CMI, Reserve Studies, Inc..

Borrowed Reserves #4. On the subject of reserves and borrowing, we define an appropriate reserve project as meeting the National Reserve Study Standards four-part test, meaning the component/project is:

1.  A common area maintenance responsibility,
2.  Life limited (expected to realistically occur in the future),
3.  Predictable (not randomly occurring), and
4.  Above a minimum threshold cost (often in the .5% to 1% of annual budget range).

There are three primary reasons why an association may be in a situation to overspend from reserves: the expense is higher than expected, the expense is earlier than expected, or the expense wasn't anticipated. All three demonstrate the need to update the reserve study regularly, learning from experience to make the reserve component list better and more accurate each year, and helping board/management know the reserve contribution needs of the association.

Realistically, those reserve contribution needs of the association will likely increase the year after reserves have been overspent as the reserve strength of the association needs to be rebuilt! In those cases I believe a special assessment may be necessary due to cash flow issues, but I don't believe a special assessment or "repay within 12 months" is automatically triggered. -Robert Nordlund, PE, RS, Association Reserves, Inc.

Alligators #1. How far do you go with the visual blight that an excess of signage creates? Do you warn against all wild mammals that could carry rabies - squirrels, raccoons, feral cats, bobcats, mountain lions, coyotes, etc? Do you warn of stray dogs that might be off lead? How about black widows, brown recluse, and bedbugs? This list goes on ad infinitum and ad nauseam. Someone needs to come up with a sign at the gate that says, "WARNING: There are things in life that can hurt you." -Jim S.

RESPONSE: Don't forget to include rabid lawyers.

Alligators #2. Regarding the article about the unfortunate episode of the alligator eating a human and a subsequent lawsuit: We don't have any alligators but we have members of our HOA who have engaged in 2 verbal assaults and one physical assault on other members. Do we need to let the membership know about this pattern of behavior, both for the protection of individuals and the protection of the board? -Lolly S.

RESPONSE: Human alligators? Warnings should be plastered all over the common areas. But you better check with legal counsel on this one, he/she might not agree. (Problem residents are particularly difficult to deal with and your options are limited. You should get your association's attorney involved. Personally, I would rather deal with real alligators than the two-legged kind--it's a lot easier.)

Commercial Signage #1. Your November 18Newsletter stated, "A homeowners association is not a governmental entity--it is a private organization with private restrictions, which means the First Amendment does not apply." I thought federal law would always apply, even within the confines of a private organization. -Richard A.

RESPONSE: Not so. The First Amendment states that "Congress shall make no law...." Accordingly, the Bill of Rights protects citizens fromgovernmental restrictions, not private ones. Thus, businesses and owners of private property can restrict the activities of others in their employ or on their property. That's why an employer can fire someone for giving political speeches or handing out fliers in the workplace or posting racist or homophobic slurs on Facebook. When it comes to homeowners associations, they can adopt restrictions on signage in their developments and restrict speech in their meetings.
Commercial Signage #3 Our association of 647 detached homes does not allow any commercial signage except for real estate sale signs which are controlled. Our rules also state that "commercial vehicles" owned by residents or their guests may not be parked overnight in private driveways or in guest parking spots. -Tom M.

Adrian J. Adams, Esq. Adams Kessler PLC