QUESTION: I would like information about how to get out of my association.

ANSWER: Option #1. Wait until dark, climb the perimeter wall and run. Option #2. Call a Realtor and list your property at below market prices for a quick sale. Disclose everything. Smile and tell buyers how much you love your association. Option #3. Dissolve your association (probably not a viable option).

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: Our board elected two vice-presidents, in addition to a President, Secretary and Treasurer! Is it legal to have two Vice Presidents????

ANSWER: There is no need to speed-dial the police. It is perfectly legal to have two vice-presidents. It is not unusual for boards to designate one director as “1st Vice-President” and another as “2nd Vice-President.” When the President can’t attend, the 1st VP runs the meeting. When the President and 1st VP both miss a meeting, the 2nd VP steps in. (See Robert’s Rules of Order, 11th edition, pp. 457-458.)

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: A buyer can’t obtain financing because the lender requires a lower delinquency for our association. If we had one less delinquency, escrow could close. The buyer wants to pay off one of the delinquent owner accounts to move the escrow along. Can this be done?

ANSWER: Yes, it can be done. It makes no difference to the association from either an accounting or income tax standpoint who pays a member’s assessment or delinquency fees. The HOA merely applies the payment to the delinquent member’s account. The best approach is for the association to put the buyer together with one of the delinquent owners (with that owner’s permission) and let money change hands between them. The recipient of the gift then pays off his delinquency.

Thank you to William Erlanger, CPA of Levy, Erlanger & Co. and Steven Schonwit, CPA of the Schonwit Consulting Group for their assistance with this question.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: If the association is named as additionally insured on the management company’s fidelity bond can it make claims against the bond? Does the management company use a single bond or do they take out separate bonds for each HOA?

ANSWER: As a reminder, a fidelity bond is a type of insurance that protects a business from losses resulting from the dishonest acts of its employees. Depending on the carrier, associations can be added as “Joint Loss Payees” on a management company’s bond. If the insurer agrees, it will pay jointly to the HOA and the management company in the event of a covered loss.

Multiple Bonds? It is unlikely a management company could buy a separate bond for each association. Instead, the carrier would issue a single bond covering the management company and all of its clients.

Coverage Limits. The problem with a single bond is the coverage limit. Is it high enough to cover all of the company’s associations? As noted last week, Fannie Mae and Freddie Mac require coverage of 100% of an association’s current reserves plus three months of assessments. How would a board know that the management company’s bond was sufficient without full financial knowledge of the reserves and assessments of all the associations the company managed? If the management company has a million dollar bond, a small portfolio of large associations would easily blow past that limit, thereby leaving all associations at risk and violating Fannie Mae requirements. Moreover, the bigger the management company, the bigger the problem.

Principals Not Covered. Another problem with traditional management company policies is that principals of the company are normally not covered by their bond since principals cannot insure against your own misconduct, only that of their employees. That puts associations at risk if the owner of the company is the one embezzling funds.

RECOMMENDATION: The best approach is to have a fidelity bond in the name of the association with a “managing agent rider” extending coverage to the dishonest acts of the management company, including the principals. As the first named insured and policyholder, the association would then have the right to submit a claim, control coverage limits (which are not shared with other associations) and receive notification in the event the policy is canceled or modified.

Thank you to Patrick Prendiville of the Prendiville Insurance Agency and Timothy Cline of the Timothy Cline Insurance Agency for their assistance with this question.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION. We have unmarried owners of separate units who both serve on the board. They have fallen love and plan to marry. Can they continue to serve on the board after they are married?

ANSWER: Provided there are no restrictions in your governing documents, a husband and wife can serve together on the board. However, you may want to advise them to first seek marriage counseling or put a divorce lawyer on retainer.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: We have a swimming pool that is unused by the many old people in our building. When I bought my unit 20 years ago, I was told that the swimming pool heater was always on from April until October. This has always been the policy. The old people who control the board, do not want to do this, thereby keeping the pool heater off until close to June. Can this be done?

ANSWER: The old people on your board may be helping Al Gore save polar bears. If not, it could be a business decision by the directors to save money. Boards are elected by the membership to oversee the common areas. One of their duties is to weigh costs and benefits when it comes to operational issues. In other words, boards can weigh the cost of heating the pool against the benefit received, i.e., the number of people who use the pool. Why should members pay higher dues to heat the pool if only one person benefits?

Litigation. The courts have already determined that boards, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, have the authority to exercise discretion within the scope of their authority when it comes to maintenance issues. It’s called “judicial deference.” Lamden v. La Jolla Shores. Thus, if you litigated the issue, you would likely lose.

Alternatives. You do, however, have recourse. You and others who are like-minded can run for the board and, if elected, turn on the pool heater. An alternative solution is the installation of a solar heating system. If you can find a reasonable means of funding the installation, you could have a year-round heated pool without the costly heating bills.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: We have a lady who feeds many stray cats in the common areas. Because she leaves out food, it attracts possums, raccoons and rodents. She totally ignores our letters. What can we do? Can we fine her? She is creating a dangerous environment.

ANSWER: You can fine her under the nuisance provision of your CC&Rs, provided the association has a published fine schedule and she is given due process. Another consideration is to bill her for any increase in pest control costs the association incurs as a result of her behavior. The costs could be charged as a fee or, if your documents allow, a reimbursement special assessment (the difference affects collection efforts). Remember, however, that if the fees end up in court, you must have sufficient evidence to convince a judge that the rat, possum and raccoon activity is the result of her behavior and not related to other factors. As a practical matter, if there are “homeless” cats that are hungry, people will feed them, whether it is this particular woman or others. You may want to work with pest control to trap the cats and remove them to a shelter. Under the law of unintended consequences, removing the cats may allow the rodent population to increase, so you should set traps for them as well.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

The FHA adjusted an element of the certification requirement for condominium associations.

Previously, management companies had to provide a separate fidelity bond insuring the association as well as themselves (creating insurance problems for management companies). The FHA is dropping the requirement for those management companies named as additional insured on the association’s policy.

But, as with most governmental agencies, the right hand does not know what the left hand is doing. Fannie Mae continues to require that  management companies carry their own fidelity coverage. Complying with FHA and Fannie Mae’s shifting demands continues to be a drag on the housing industry.

RECOMMENDATION: Boards wanting to meet FHA and Fannie Mae requirements should talk to their association’s insurance broker.

Thank you to Scott Iden of US Approvals, LLC, a company specializing in FHA certifications, for this update.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

QUESTION: According the the Secretary of State website, I cannot file Form SI-100 online because a CID corporation must also file a SI-CID. For some reason the second form is not online. I submitted paper forms via snail mail only to find out 5 months later that one field was missing a +4 zip code. An online process with a credit card would be much more efficient and insure that forms are correctly filled out before submission. What can I do to help push this process into the computer age?

ANSWER: California government is always behind the business community when it comes to new technology and customer service. As a rule, state agencies tend to be slow, inefficient and costly. Recent paleontological digs have found California’s seal mixed with dinosaur bones in the fossil record. Unlike dinosaurs, however, state agencies never die. They just get bigger.

RECOMMENDATION: Lobby your legislator.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP

Homeowners who volunteer to serve on their boards quickly learn they cannot please everyone. Some owners have legitimate complaints, some complain because they love to complain, and a third category turns malicious. The board of a small association in Orange County had close encounters of the third kind and fought back.

The board suffered through years of abuse from a husband and wife. When the couple focused their attention on the president with unrelenting harassment that culminated in threats and 119 harassing telephone calls in less than two months, the president sued the couple.

The trial lasted five days. The twelve jurors were outraged by the couple’s conduct and returned a unanimous verdict awarding the president $1 million in emotional distress and punitive damages. (Avetoom v. Fridman, Case No. 30-2010-00345490.)

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP