Category: Case Law

Throughout the nation, our democratic system of government faces increasing scrutiny each year. This scrutiny is justified as challenges to election processes multiply. Whether it’s stockholder votes, HOA elections, or state and local elections, none are spared from the scrutiny they rightfully deserve.

An HOA directorship, once held in high regard, now suffers from a tarnished reputation that continues to deteriorate. In some areas, those serving as Directors or trustees struggle to grasp the simplest concepts, like “fiduciary responsibility.” If you’ve watched HBO’s Last Week Tonight recently, you’ll know exactly how dire the situation is. [For a deeper dive, check out my post: https://www.hoadvocate.com/homeowners-associations-last-week-tonight-with-john-oliver/]

In California, the bar to serve as an HOA Director is laughably low, with no requirement for education or training. Removing a Director is akin to pulling teeth, requiring a recall or a court order under Corporations Code § 7223. For those brave enough, my recently resolved 7223 Petition (Kruschen v. Annandale Townhouse Association, Inc., and Steven Gittleman) awaits your perusal: https://www.hoadvocate.com/wp-content/uploads/2023/03/2023-03-07-FA-23VECP00088.pdf

HOA elections in California are tightly regulated, thanks to Senator Bob Wieckowski, who waged war on corruption with SB-323 in 2019. [For the gory details, see: https://www.hoadvocate.com/new-election-rules-why/] Wieckowski’s crusade didn’t stop there; SB-432 in 2021 was another blow to those who seek to manipulate the system. [More on that here: https://www.hoadvocate.com/sb-432-wieckowski-does-it-again/]

According to an April 2, 2019, Senate Judiciary Committee report, “The California Appellate courts have ruled repeatedly that associations parallel in almost every way the powers, duties, and responsibilities of local government. The original legislation to create integrity in association elections built on these opinions by stating that ‘it is the intent of the Legislature to ensure that democratic principles and practices are in place with respect to the governance of common interest developments.’ Nowhere in association governance are democratic principles more vital than during elections […] Unfortunately, since their enactment, the California laws governing association elections have been ignored or violated or undermined […]. SB323 aims to address these abuses.”

A July 9, 2019, Assembly Committee on Judiciary report notes, “…SB323 makes it harder for associations to manipulate HOA elections and goes a long way toward restoring confidence in this essential democratic process.”

It’s crystal clear that safeguarding the integrity of HOA director elections isn’t just a state concern; it’s a rallying cry for conscientious HOA members everywhere. Obtaining a directorship through a flawed election undermines its legitimacy.

Despite my relentless warnings to the HOA beginning in September 2022, the election inspector, Michelle Kelly of Correct Elect, LLC, remained defiant. Michelle was made aware of the issues but turned a blind eye, refusing to rectify her errors or invalidate her sham election and start anew. An act of cowardice that would’ve spared the HOA further strife.

As a consequence, I took decisive action and filed a shareholder lawsuit under Corporations Code § 7616 and Civil Code § 5145. Los Angeles County Superior Court Case No. 23VECV05191, filed on November 20, 2023, exposed a litany of violations of state law and the HOA’s governing documents.

Among the litany of spectacular failures, the HOA neglected to mail election materials to all members, disregarded correct mailing addresses, failed to confirm nominations, bungled the distribution of a compliant candidate list, misidentified the 3-year terms of office, neglected to properly provide meeting notice to members, flouted in-person ballot counting meeting requirements, accepted non-compliant proxies, accepted proxies in lieu of ballots, and allowed 50 ballots to materialize after the predefined cutoff.

Did Annandale, Martinez, Wagner, Grossman, Perl, and Atkinson do the right thing and acknowledge their legal quagmire, ordering a new election? Absolutely not. They were hell-bent on squandering our HOA’s cash, with conservative estimates tallying over $100,000, to defend the indefensible notion that the failures had no impact on the election results. But math doesn’t lie. Add or subtract a ballot, and the results change. Deny members the right to vote, and the outcome is tainted.

For five interminable months, Annandale, Victor Martinez, Scott Perl, James Grossman, Jeff Atkinson, and Anthony Wagner flailed about incoherently with their lawyers, Leonard Siegel and Gerard Kilroy of Kulik Gottesman Siegel & Ware LLP. They thought deflection, character assassination, and scapegoating would save them. But I keep meticulous records. I’m a relentless communicator. As witness William Springer attested, I “don’t hold back.” The evidence  presented was overwhelming and voluminous, and Judge Harmon affirmed in his order, “…the court finds that the defendant has not established that any noncompliance did not affect the results of the election.”

SUCCESS!

Per the judgment entered today, March 26, 2024:

•Annandale’s October 2023 director election is invalid and void.

•Defendants VICTOR RENE MARTINEZ, ANTHONY WAGNER, JAMES GROSSMAN, SCOTT PERL, and JEFFERY ATKINSON do not comprise the Board of Directors, and are not authorized to act on behalf of the Association, engage in Association business, or conduct Association affairs.

•A new director election shall be held in compliance with the relevant laws of the State of California and the Association’s CC&Rs, Bylaws, and Election and Voting Rules.

•Plaintiff is the prevailing party in this action.

I extend heartfelt gratitude to William Springer, and Doreen Murray of Sunrise Property Management Group, for their truthful testimony during the three-day bench trial in February. I owe a debt of gratitude to James E. Perero, partner at Myers, Widders, Gibson, Jones & Feingold in Ventura, and his associate Monique Fierro, for their astute prosecution of the case, demonstrating wisdom, intelligence, pragmatism, and a mastery of the subject matter.

Clients often report a common intimidation tactic used against them, where they are warned, “You’ll be responsible for covering the HOA’s attorney fees,” as a means to discourage them from pursuing accountability for their HOA’s wrongdoing.

A significant legal development was addressed in an appellate ruling from last month in the case of LNSU #1, LLC v. Alta Del Mar Coastal Collection Community Assn. In this post, I will focus on the issue of fee-shifting.

In LNSU #1, LLC v. Alta Del Mar Coastal Collection Community Assn., the Court of Appeal had to grapple with the interpretation of the term “frivolous, unreasonable, and without foundation” within the context of a fee-shifting provision outlined in the Common Interest Development Open Meeting Act (OMA), specifically Civil Code §4955(b). This provision allows for fee shifting to a prevailing Homeowners’ Association (HOA) if certain prerequisites are met.

In this case, two homeowners had initiated legal action against their HOA for OMA violations. The lower court ruled against the homeowners on the merits of their claims, and this decision was upheld by the appellate court. However, the lower court awarded the HOA $8,874.61 in standard costs and rejected the homeowners’ motion to challenge or reduce these costs. Additionally, the lower court granted the HOA $348,306 in attorney’s fees (out of a requested $405,282.50) under the Davis-Stirling Act (Civil Code §5975(c)), rather than the cost-shifting provision of the OMA.

The appellate court ultimately reversed both the cost and fee awards against the homeowners. The issue with the fee award stemmed from the fact that the homeowners had not brought a claim under the Davis-Stirling Act, which is based on the HOA’s governing documents. Instead, they had invoked the OMA, which only allows for the recovery of regular costs (not attorney’s fees) in favor of a prevailing HOA.

The focus then shifted to the regular costs award. The appellate court interpreted the “frivolous, unreasonable, and without foundation” criteria for awarding costs to a prevailing HOA to incorporate the “any reasonable attorney” standard, as established in cases such as Smith v. Selma Community Hospital, 188 Cal.App.4th 1, 33 (2010). Given this standard, the homeowners’ positions were subject to debate and had not been definitively resolved previously. Consequently, there existed legal uncertainty, which did not warrant the imposition of standard costs under the circumstances. Even though the homeowners had rejected the HOA’s §998 offer, the specific OMA cost-shifting provision took precedence over the §998 cost-shifting mechanism.

It’s important to note that while it’s true that homeowners pursuing legal action against their HOAs to enforce governing documents may potentially face liability for the HOA’s attorney fees if they do not prevail, there is a strategic alternative. With the constantly evolving laws concerning common interest developments, often mirroring the Civil Code and Corporations Code, initiating action under these code sections, as opposed to pursuing a governing document enforcement action, can offer a clear pathway to avoid fee shifting in bona fide legal actions.

Another takeaway is that Alta Del Mar Coastal Collection Community Association spent over $400,000 to defend itself and now there’s some great law everyone can benefit from!

“I tuned in to the tail end of your call last week on WFTL regarding the Wolf v. Carpenter, Hazlewood, Delgado & Bolen, LLP case and your optimism about the Supreme Court considering the petition for certiorari. Regarding the issue of homeowners refusing to pay their dues, why shouldn’t the HOA have the ability to access the owner’s credit report, just like any other creditor would for a debtor?”

 

Let’s be honest, especially in California, the Homeowners’ Association (HOA) system is seriously flawed. People’s satisfaction with HOAs is at an all-time low, yet more unsuspecting people are getting involved in them than ever before. What’s concerning is that virtually anyone can become a Director, Officer, or Community Manager in an HOA without any legal requirement for licensing, credentials, training, or certification. Those uneducated humans make mistakes, and often.

The U.S. Supreme Court is being asked to decide whether a standard HOA assessment qualifies as a “credit transaction” under the Fair Credit Reporting Act (FCRA), giving HOAs the right to access a homeowner’s credit report.

There’s a significant division among different circuits when it comes to defining what constitutes a “credit” transaction. Back in 1984, the Ninth Circuit ruled that any transaction involving deferred payment should be considered “credit.” On the other hand, the Second, D.C., and Seventh Circuits have all asserted that if payment happens substantially at the same time as the performance of a service or goods delivery, it shouldn’t be considered a “credit transaction,” even if some payments are deferred.

The central question here is whether all transactions involving deferred payment, regardless of the timing of payment in relation to performance, should be labeled as “credit transactions” according to the FCRA.

According to the petition, “Within the Ninth Circuit alone, there ‘are likely millions of homeowners… subject to homeowner association assessments.’ [Pet. App. 3a]. And although the Ninth Circuit Panel did not rule on whether HOA assessments are credit transactions, it affirmed the District Court’s holding that they are. By affirming that ruling, the Ninth Circuit not only remains out of step with a thirty-year doctrinal trend, but it also undermines the privacy of millions of homeowners.”

This case isn’t just about homeowners who are behind on their assessment payments; it affects all homeowners who pay their assessments on time or even prepay them. If deferred payments like assessments are deemed credit transactions, it will continue to grant HOAs the authority to access the credit reports of their members. Can you really trust your HOA to maintain the confidentiality of your HOA records? Do you believe your HOA will provide accurate records when you request them? Do you think your HOA’s Community Manager and governing body genuinely prioritize the privacy protection of their members? I have my doubts, as their actions consistently fail to align with their promises, time and time again.

Given the utmost importance of homeowner privacy, and unless there’s a case of overdue payments, I believe HOAs should not have the authority to access the credit reports of homeowners.

Finally, I suggest checking out attorney Eric Glazer’s blog titled “Florida HOA & Condo Blog…Why can’t we be friends?” available at www.hoa-condoblog.com. Regardless of your state of residence, you’ll find valuable information to assist homeowners and trustees in navigating the ever-growing challenges in the world of HOAs.

“I sit on a few Boards including two common interest developments, one commercial and one residential. My fellow Directors love your stuff. A friend serves on his HOA Board and since he’s the new guy, he wants to get up to speed. They are self managed and he’s facing resistance from the rest of the Board as he tries to get the corporate records he is entitled to. You’d think he’s pulling teeth versus just trying to get some meeting minutes. He doesn’t want to throw in the towel but it’s starting to not be worth his time. Any words of wisdom?”

 

The California Court of Appeal, Third Appellate District recently reaffirmed the right of directors of a California corporation to inspect their company’s books and records in Fowler v. Golden Pacific Bancorp, Inc. The court clarified that this right exists even when a director has a conflict of interest or is involved in litigation with the corporation. Generally, directors may be denied access to books and records only in extreme cases where evidence shows that the director intends to abuse their rights under California Corporations Code section 1602.

The case arose out of separate ongoing litigation commenced by Golden Pacific Bancorp. Fowler was a member of Bancorp’s board of directors and the chief operating officer of Bancorp’s former outside counsel. Bancorp sued Fowler and their former outside counsel for various breaches of contract and duties. Two months after the commencement of that litigation, Fowler sought to inspect and copy various books and records of Bancorp pursuant to Corporations Code section 1600, et seq. Bancorp denied the demand, arguing that Fowler had a conflict of interest and was seeking access to the books and records for an improper purpose.

Rather than enforce his statutory right immediately, Fowler attempted to acquire the same documents through discovery in the ongoing suit. Bancorp refused, and the trial court denied a motion to compel production. Only then did Fowler file an action against Bancorp to enforce his section 1602 rights.

Fowler filed for a peremptory writ of mandate to enforce his rights as both a shareholder, under section 1600, and as a director, under Section 1602. Bancorp responded that Fowler was seeking the records for the improper purpose of defending Bancorp’s lawsuit against him. The Court sided with Fowler on the section 1602 argument.

Bancorp appealed, but the Court of Appeal held that the section 1602 dispute was moot because Fowler was no longer a director. Nevertheless, the Court decided to address the issue because it was of substantial public interest.

The Court focused on the language of section 1602, which provides that directors have the absolute right at any reasonable time to examine and copy corporate records and documents of every kind. Although the absolute nature of this right must be far-reaching to reflect the legislature’s choice, section 1602 still has limits. For example, courts may curtail inspection rights when a director intends to use them to harm the corporation. This exception, however, is narrow; in this case, the Court saw no evidence that Fowler intended to harm the corporation, and the mere possibility of harm is not enough to limit directors’ inspection rights.

The Court explained that California law accords directors a broad right of inspection of corporate books and records, reflecting a policy that greatly favors an expansive right of access to allow directors to materially participate in corporate affairs. California corporations still have a remedy against directors who abuse their right of inspection through a direct action against a director for breach of fiduciary duty if they abuse section 1602 to harm the corporation.

Your friend should forward this blog post to his fellow Directors along with his formal request, again, and see what their response is.

“Help me HOAdvocate, you’re my only hope! I own two townhomes located next to each other. My family and I reside in one of the units, while we purchased the other as an investment property in February after our neighbor passed away. During the buyer’s inspection, we discovered that the roof over the investment property was in poor condition and required replacement. We informed the HOA of the issue after we closed escrow, but they refused to take any action.

Recent rains caused $15,000 in water damage to the ceiling, walls, and wood floors of the investment property. After applying a lot of pressure, the HOA eventually replaced the roof on the whole building, which included our two townhomes plus the third we do not own, but they are unwilling to cover the cost of repairing the damage inside our second unit. We cannot file a claim since we just bought the property this year. Fortunately, we are not renting it out, so we have some time to deal with the issue.

What should we do to persuade the HOA to do the right thing?”

 

We actually encounter situations like this frequently. While I have not read your CC&Rs, it is common for condo and townhouse CC&Rs to have an exculpatory clause that denies liability for any interior damage, regardless of the cause. To proceed, you should first identify the precise wording of this clause in your CC&Rs. It is worth noting that the typical response of an HOA is to deny any responsibility for liability. Therefore, you may need to put in some effort to pursue your claim.

The good news is that you may have a valid claim for damages based on the HOA’s negligence. You recently purchased the unit, were advised by an expert that there was a problem, notified the HOA of the issue, and they did nothing, resulting in your loss.

To pursue your claim, you should demand an IDR over this dispute and make your case clear. For instance, you could say, “We informed you of the problem but you neglected to address it. Your negligence caused us to suffer losses. If you had repaired or replaced the roof within a reasonable timeframe after we notified you, we wouldn’t be in this situation.”

If you don’t want to go through the IDR process, you can file a small claims suit in your county. Keep in mind that the jurisdictional limit for small claims is $10K, so if your repair costs are $15K, you have to be ready to eat the $5K difference.

Either way you go, a good lawsuit to cite is Cohen v. Kite Hill Community Association (1983) 142 Cal.App.3d 642. Cohen provides the law showing that exculpatory clauses in CC&Rs are generally disfavored. A case you might want to watch is Lazarov v. Interinsurance Exchange of the Automobile Club, et al. (L.A. Superior Court No. 22BBCV00669) which was filed about two months ago. It contains some similarities to your situation.