Does Ethics Have A Seat On Your Community Association Board?

Board members of community associations juggle three different hats.  One is the “I am a homeowner hat.”  Another is the “I want to be a good neighbor hat,” and the third is the “I am a board member hat.”  It is sometimes difficult for board members to always know which “hat” they are wearing at which time.  Even when not physically at a board meeting, a director must consider which “hat” he or she is wearing when speaking with other homeowners, making notes about issues of concern to the community, writing an article for the community newsletter, and the like.   It is easy for a director to feel badly for a neighbor who may be having tough financial times and wish to extend some hardship accommodation, as a good neighbor might want to do.  However, what about the owner who no one likes, isn’t suffering a financial hardship, but is looking to play the angles and wants a similar accommodation?  This is a not an altogether uncommon dilemma.  This is where an understanding of not only the statutory duties imposed upon a director is essential, but also having a framework for making the correct ethical choice as well.

The California Corporations Code at Sections 7231, et.seq. outlines the fiduciary duties of due care, loyalty and avoidance of conflict rules applicable generally to directors of California Mutual Benefit Corporations, such as community associations.  Most directors are familiar with these statutory pronouncements and the protections afforded by the business judgment rule, codified at California Corporations Code Section 7231.5.  Ask most board members and, while they may not be able to cite the applicable statutes, will tell you in general terms that they understand they have fiduciary duties to the community.  Nevertheless, boards and individual board members continually make wrong, improper and unethical decisions.  It may be time for boards and their managers to develop a Code of Ethics.  This has nothing to do with one’s personal ethics.  Instead, it is an opportunity to understand and create an ethics for the organization.   By having such a Code, board members and their managers may better be able to make the tough choices and to catch themselves before going astray which could lead to a violation of the Governing Documents or the law.  The services of the board of directors require honesty, impartiality, fairness and equity.  But more is also required.  The board of directors must also perform under a standard of professional behavior that mandates adherence to the highest principles of ethical conduct and decision-making.  If your Association or other nonprofit would like assistance in developing a Code of Ethics, please contact the non-profit attorneys at Schneiders and Associates.

By: Roy Schneider, Esq. 

Considerations in Converting a For-Profit into a Nonprofit

Business owners may decide to make the switch from a for-profit corporation to a 501 (C) (3) tax-exempt nonprofit organization when their purpose has shifted from making a profit to furthering a social or charitable cause. There are several factors to consider before making this important decision which include the loss of individual control, primary goals and activities of the corporation and the appropriate method of transition.

A nonprofit corporation is a legal entity that has no ownership, so existing shareholders must give up their ownership. Appointed board members will have control over the governance and oversight of the corporation.  The board of directors’ primary goal must be something other than making a profit. There is no longer an obligation by the board to increase profits. There are also special rules that apply to directors.  In California, a nonprofit cannot have more than 49% of its directors be “interested persons”, which includes any person receiving compensation from the nonprofit for services rendered within the past 12 months and their close family member.

In addition, activities performed by the tax-exempt nonprofit corporation are performed at the direction of the board. The activities of the nonprofit must be consistent with its 501(c)(3) tax-exempt status. 

Shareholders must also consider the method of converting to a nonprofit, whether it be through an amendment to the articles of incorporation or by forming a new nonprofit and transferring the corporation’s assets and programs. The conversion of a for-profit corporation to a nonprofit requires that the corporation lock all assets in a charitable trust and may only be used for charitable purposes. Alternatively, assets can be gifted from the for-profit shareholders to the nonprofit which may make the process easier to obtain tax exemption from the IRS.  In other words, it may be simpler to form a new nonprofit corporation as opposed to the conversion from a for-profit to obtain tax exemption from the IRS.

Whether you are considering converting a For-profit corporation to a nonprofit or forming a new nonprofit, our knowledgeable attorneys at Schneiders & Associates, L.L.P. can guide you through the process and assist with all nonprofit related legal matters.

By: Roy Schneider, Esq.

New Bill Poses Limitations and Unnecessary Expenditures

By: Roy Schneider, Esq.

Early this year, an act to amend Section 4925 of the Civil Code, relating to common interest developments was introduced by assembly member, Don Wagner. The proposed bill will allow any community association member’s attorney to attend all association board meetings which the member may attend.

While it may seem like common sense to allow a member’s attorney to be present at any board meeting where he or she may be present, the realistic implications of the proposed bill pose discussion limitations and unnecessary expenditures for common interest association boards. For example: Not all associations currently have legal counsel, and those that do, do not always have their counsel attend the entire board meeting. Should a board choose to continue that approach, they could experience discussion limitations at meetings due to volunteer board members’ fears of liability and of how the discussions may be used in the future. In another instance, an association board may decide to combat liability and discussion limitations by having its own counsel present at all meetings- then threats of increased legal fees ensue.

If you serve as a volunteer on a community association board and you have questions about how this proposed bill amending section 4925 will impact the way your association board will operate, contact an attorney at Schneiders & Associates, LLP, a law firm providing comprehensive legal services including advice and assistance on these types of matters for more than thirty Homeowners Associations in Ventura, Santa Barbara, and San Luis Obispo Counties.


Client Alert – AB 2755 Signed Into Law Prohibiting “Non-Voting Directors” on Non-Profit Boards

Governor Jerry Brown signed AB 2755, which amends Corporations Code Section 5047, to make it clear that a person is only a director as defined in the statute if that person has the right to vote as a member of the governing body and that a person who is a director by virtue of occupying a specific position within or outside the corporation (an ex officio director) can only be a director if that person has the right to vote as a member of the governing body. AB 2755 will take effect on January 1, 2015.

California’s Drought’s Impact on Your Common Interest Development

Published in the CAI-CIC Channels of Communication Second Quarter 2014 Magazine

By Roy Schneider, Esq.

California’s three-year dry spell is taking a toll on the economy and environment.  Last year was the driest ever in California, since record-keeping began in 1895.  According to the California Farm Water Coalition, the lack of water needed to produce everything from milk and beef to wine and avocados could result in lost revenues exceeding $5 billion in 2014 alone. With such a limited supply of water, where is this precious resource going?  While agriculture certainly accounts for a significant percentage of water use in our state, residential outdoor landscaping – watering gardens and lawns – actually accounts for 35 percent of all urban water use, according to the State Department of Water Resources.

In light of our drought conditions, many homeowners associations are finding themselves between a rock and a hard place.  Homeowners associations are used to citing and fining homeowners for having dead lawns or landscaping that is not up to par.  We can all appreciate that one of a homeowners association’s primary responsibilities is to maintain the development’s pleasing aesthetics, thereby protecting property values.  However, many homeowners are desirous of acting in an environmentally conscious manner, and in an effort to conserve water, their grass may be looking a little less green.  Some cities are actually requiring homeowners to ration their water use, thus preventing regular watering of gardens and lawns.

Of course HOA’s should have the authority to make their homeowners keep their yards up to standards.  But what should those standards be in light of the worst drought in over 100 years?  Faced with these competing interests – HOA’s wanting to ensure beautiful yards, and homeowners wanting to conserve water – enter the California State Legislature.  Assemblywoman Lorena Gonzales of San Diego has introduced AB 2104, proposing to amend the Davis-Stirling Act to further accommodate water-efficient landscapes.

Current law provides, in Civil Code section 4735, that any provision in a common interest development’s “governing documents” that prohibits low water-using plants as a group, or restricts homeowner compliance with a local water-efficient landscape ordinance or water conservation measure, is void and unenforceable.

AB 2104 goes further, and adds architectural and landscaping guidelines and policies, as well as decisions by the HOA’s board of directors, within the definition of “governing documents” that are void if they prohibit water-efficient landscaping.  The bill also would void any policy that prohibits, or includes conditions that have the effect of prohibiting, the replacement of existing turf with low water-using plants.

The bill is sponsored by a trade group of attorneys called the Conference of California Bar Associations.  In seeking to change current law and invalidate HOA policies restricting low water-using plants, the attorneys stated, “these policies, rooted in aesthetics, discourage the wise use of a precious and increasingly scarce public resource for which there is increasing demand….The state must take appropriate steps to promote water efficiency to preserve a challenged water supply.”

It should be noted that this bill, as well as existing law, does not require HOA’s to permit artificial turf.  Artificial turf is not a “plant,” so, even if AB 2104 passes, HOA’s will still be permitted to prohibit artificial turf.  However, any HOA policies or architectural standards that require grass lawns or prohibit or even discourage water-efficient landscaping are problematic.  For example, HOA policies cannot prohibit xeriscaping, a common form of drought-tolerant landscaping, utilizing native plants, mulch and certain soils in place of grass or flowers.  If your HOA has a policy that requires approval for changes to landscaping, the approval process should be simple, and not overly burdensome or costly for a homeowner to obtain approval to replace his or her lawn with a drought-resistant landscape.

In light of our unprecedented drought condition, current law and pending AB 2104, now is a great time for HOA boards to revisit their landscaping policies and architectural guidelines to ensure such policies are in compliance with the law, and are designed to promote both beauty as well as water conservation.

Roy Schneider is a partner at Schneiders & Associates, L.L.P. where he advises and guides his association clients with respect to board meetings and membership, including notice requirements, minutes, Open Meeting Act, executive sessions and elections. He assists boards with negotiating and drafting contracts, interpreting existing agreements, and enforcing them when contractors fail to abide by their terms.  Roy is also an Adjunct Professor at the University of La Verne, Oxnard Campus where he teaches business law and business ethics.

New Laws Assist Non-Profits

By Roy Schneider, Esq.

Effective January 1, 2014, non-profit organizations exempt from taxation under Sections 501(c) (4), (5), (6) or (7) of the Internal Revenue Code (IRC) provisions may now apply for state exemption in California using short Form 3500A, rather than the lengthy Form 3500. Those non-profit entities primarily benefitting from the new legislation include civic leagues, social welfare organizations and local associations of employees (exempt under 501(c)(4)), labor, agricultural and horticultural organizations (exempt under 501(c)(5)), business leagues, chambers of commerce, and real estate boards (exempt under 501(c)(6)) and social and recreational clubs (exempt under 501(c)(7)). Assembly Bill 1173 amends California Revenue and Taxation Code Sections 23701 and 23701d. Because organizations qualified as tax exempt under IRC Section 501(c) (3) have enjoyed this efficiency since 2008, it is expected that the new provision will result in increased expediency on the part of the Franchise Tax Board in processing applications for state exemption for these non-profits without delay. Since it is now relatively easy for most non-profit organizations with a federal exemption to obtain their California exemption, non-profit start-up organizations should be careful not to neglect to obtain their state exemption, and avoid the risk of being subject to administrative hurdles and unfavorable tax consequences.

Assembly Bill 491, also effective January 1, 2014, provides authorization for corporate activities during emergencies and the adoption of emergency bylaws. Applicable to both non-profit and for-profit corporations, it validates actions taken in good faith in anticipation of or during an “emergency”, and shields corporate directors, officers and employees from liability arising from said actions. “Emergency” is defined as a natural catastrophe, an attack on the state or nation by an enemy of the United States, a warning from the federal government that an attack is imminent, an act of terrorism or other manmade disaster resulting in extraordinary damage or disruption, or a state of emergency proclaimed by the Governor or the President, and in any case, only so long as a quorum of the board of directors cannot be readily convened. Emergency bylaws may contain provisions to manage and conduct the ordinary business affairs of the corporation effective in an emergency, including, but not limited to, procedures for calling a board meeting, quorum requirements, and designation of additional or substitute directors. The new law provides that unless the bylaws specify otherwise, in anticipation of or during an emergency, lines of succession may be modified to accommodate incapacity resulting from emergency, and principal corporate offices may be relocated or an alternate office designated. Notice to directors may be given in any practicable manner under the circumstances, and one or more officers of the corporations present at a board meeting may be deemed “director(s)” in order of rank and seniority, as necessary to achieve a quorum for that meeting. Finally, no action may be taken during an emergency not in the ordinary course of business, unless the required vote of shareholders and/or members, if any, was taken prior to emergency. 

As part of their disaster preparedness planning, corporate clients may consider adding a provision to their bylaws referencing the new emergency provisions in the Corporations Code as a means of increasing organizational efficiency during emergencies. For more information on the either of these new laws, contact a knowledgeable business attorney at Schneiders & Associates, LLP.

Newer HOA’s—Know Your CCR’s

By Kathi J. Smith, Esq.

Common interest developments built after 2003 have the most up-to-date floorplans and modern amenities, which is why owners love them. These new construction homes also have a clock ticking on remedying any construction defects they may have. When the development is ten years old, the clock runs out, and the builder cannot be held liable for construction defects in the homes or common areas. Don’t fumble the chance to place responsibility where it belongs.

These younger communities probably have Amended and Restated CCR’s covering their relationship with the builder. These HOA boards should familiarize themselves with the CCR procedure for asserting a construction defect claim. Don’t be surprised if it is very complicated. Newer CCR’s may have several required steps, including allowing the builder an opportunity to repair the defects, and required Alternate Dispute Resolution instead of a lawsuit. These steps can trip up unwary HOA’s, and allow the builder an end run around its duties.

Now is the time to retain a professional to perform a comprehensive inspection of the development, to determine whether there are construction defects that need to be addressed with the builder before the clock runs out. Also, review all owner complaints. When your ten year clock expires, there is no overtime period. And that’s a call you can’t challenge by throwing a red flag on the field. The referee can’t change the call.

Contact Schneiders & Associates, L.L.P. to schedule a comprehensive review of your HOA’s CC&Rs and other governing documents as well as to assist your HOA in obtaining a inspection report of your development.

My Neighbor in my Homeowner’s Association Told Everyone I’m a Drug Dealer, Can I Sue For Defamation

By Ted J. Schneider, Esq.

Assuming you are, in fact, not a drug dealer, you may be able to successfully bring a civil lawsuit for defamation. Defamatory statements are those untruths which harm your reputation. While defaming another person is not a crime, it is a civil tort and the victim can seek redress in the courts for damages incurred.

Defamatory statements can be spoken, gestured, written or pictured. Written defamation is referred to as “libel” and spoken defamation is known as “slander.” Oral defamatory statements generally have a shorter lifespan than those fixed in a written form; therefore, most courts deem libel to be more injurious than slander. In order to prevail in a civil lawsuit for defamation, you must prove to the court that the defamatory statement made against you was:

  • False; and
  • Published; and
  • Caused injury; and
  • Was not privileged

First and foremost, the statement must be false. If you happen to occasionally dabble in the drug trade, such an accusation against you would be true and, therefore, would defeat your claim for damages. A truthful statement, no matter how harmful to your reputation, is not considered damaging in the civil liability sense. Similarly, opinions are not considered defamatory because it is impossible to present evidence that objectively proves that the statement is false.

You must also prove to the court that the statement was published, or somehow communicated to a third party. Publication does not mean it must be published in print or on the internet; this requirement is met whether the statement was communicated over the media, through gossip, overheard in conversation, or via flyers and signs. The only requirement is that the statement is communicated to a party other than yourself or the person making the statement.

Because the primary purpose behind defamation law is to compensate a victim for damage to his or her reputation, in order to prevail in a defamation lawsuit you must be able to prove that you were injured by the defamatory statement. Damages may include being shunned by business associates or neighbors, lost income opportunities, or even being hounded by the media. Some types of false statements are considered defamation “per se” and do not require the victim to prove injury, including allegations that you have committed a crime, have an infectious disease, are guilty of sexual misconduct, or are professionally incompetent. Accordingly, an untrue statement that you are dealing drugs – an allegation that you are engaged in criminal activity – would fall under defamation “per se,” easing your burden of proof.

Finally, the statement must not be privileged. In certain instances, statements made are privileged and the person who made the statement cannot be sued for defamation even if the statement turns out to be false. For example, those testifying in court or at a deposition cannot be sued if their testimony turns out to be untrue.

In HOAs it is not uncommon for gossip to be spread about one of the residents. This is often a by-product of living in a closed community. Be careful not to spread a rumor. By doing so the information is now “republished” and, if false, exposes each person who spreads the rumor to a possible defamation claim. 

There’s an added wrinkle for public figures who face a higher burden of proof. Elected officials, celebrities and other public figures must also show that the false statement was made with “actual malice,” meaning the person who made the statement either knew it was false or acted with reckless disregard for whether the statement was false.

Do You Need Meeting Minutes?

By Roy Schneider, Esq.

Regardless of the size of the business, organization or homeowners association, corporations (including those organized under Subchapter S) must observe all of the required formalities in order to maximize the benefits of a corporation. Corporate meeting minutes document the decisions made by the company’s board of directors, and are necessary to preserve the “corporate veil” in the event of a lawsuit or other claim against the company. If corporate formalities are not observed, your own personal assets may be at risk.

One such formality is the maintenance of a corporate record book containing minutes of meetings conducted in accordance with the company’s bylaws. Even in a one-person corporation, board resolutions must be drafted, signed and kept in the corporate records. Every major decision that affects the life of the business must be ratified by a board resolution contained in the corporate records.

There is no specific required format for meeting minutes, but the document should include any important decision made regarding the company, its policies and operations. Minutes should include, at a minimum:

  • Date, time and location of the meeting
  • Names of all officers, directors and others in attendance
  • Brief description of issues discussed and actions taken
  • Record of how each person voted, whether the vote was unanimous and whether anyone abstained from voting
  • Vote and approval of the prior meeting’s minutes

How do you know whether a decision needs to be documented in the meeting minutes? Generally, if a transaction is within the scope of the company’s ordinary course of business, it need not be addressed in the minutes. On the other hand, major decisions should be documented in the minutes, such as:

  • Significant contracts
  • Leases
  • Loans
  • Marketing campaigns
  • Reorganizations and mergers
  • Employee benefit plans
  • Elections of directors or officers

Non-incorporated entities such as limited liability companies are generally exempt from performing such formalities.

If you operate your for profit business, nonprofit business, or homeowners’ association as a corporation and have not maintained your minutes up to date, Schneiders & Associates, L.L.P., can do that for you and make sure that going forward your minutes are current. Remember, should your corporation ever be sued or subject to a governmental audit, you will be requested to provide your minute book. If it is not accurate and up to date, you will lose the benefits of incorporation. Call today for an estimate on bringing your corporate records up to date.

Schneiders & Associates, L.L.P. is a multi-service law firm located in Oxnard, California with a focus in business, non-profit and homeowners association related matters.

CC&Rs – To Update or Not

Published in the CAI-CIC Channels of Communication First Quarter 2013 Magazine

By Ted J. Schneider, Esq.

As HOA attorneys, we are often asked by homeowners and managers alike: “Should we now update our CC&Rs”? Given that most of the CC&Rs we see were written either while Nixon was President, the Berlin Wall was still standing, before there were cell phones, or when the Olsen twins were still in diapers, the answer should appear obvious. If you look at your existing CC&Rs, you will find a 60, 70 or 90 page instrument which is a model of ambiguity, obfuscation, flawed grammar and paragraph after paragraph of meaningless and legally irrelevant words. 

Perhaps your CC&Rs contain a requirement such as this one: “No unit may house more than 1 dog or 1 cat or both at any one time.” Or, perhaps this nod to incredulity: “A unit may not be used for any illegal, illicit or immoral purposes without the consent of the Board of Directors”. Perhaps the drafter of this provision wasn’t sure if in the future, the association would become a monastery or a bordello and believed that flexibility was the key. One provision we recently reviewed obligated the owner to be “strictly liable and responsible for the unruly and obnoxious behavior of their pets, including dogs, cats and fish.” We certainly were glad to see that someone finally took a stand against those pesky annoying fish that plague our associations. One of our favorite CC&R statements is the one that limits the parking spaces to, “….owners, guests, tenants, invitees, and other persons authorized, including those who are not authorized but would be authorized if someone with authority would have authorized such person if they knew of their intent to park in a space reserved for authorized persons.  Trespassers or those intending to cause damage or injury to persons or property on the premises, may not park in any space regardless of authorization….”  You got to love lawyers.

If you have read this far, keep reading because you will see something you may never see again.  With respect to your CC&Rs, KEEP THEM SIMPLE! That’s right, attorneys advising you to keep things simple and easily understandable. That is not our usual style. Why say something in five words when it can be said in fifty?

Most CC&Rs regurgitate the statutes as written at the time of the document’s adoption. Just as the world has dramatically changed since Richard Nixon was in the White House, so has the law pertaining to Common Interest Developments. We do not believe it necessary or even advisable to insert the terms of many of the statutes in an instrument which is very difficult to modify and which rather quickly becomes outdated. For example, many CC&Rs are bogged down by lengthy and complex financial reporting and budgeting requirements. However, these requirements are already required by the Davis-Stirling Act and explained in detail in the Civil Code, which constantly evolves. Homeowners reviewing their CC&Rs but not familiar with the statutory structure, may not realize that the section they are reading, and upon which they are relying as some authority for their position, no longer reflects the law. In our experience, it is a better practice to put as much of the governance and operational requirements in the by-laws or Rules, which generally are more easily modified than the CC&Rs.  CC&Rs do have an essential function however, and its provisions should be limited to those. 

For example, your CC&Rs must clearly detail the respective maintenance obligations of the association and individual owners, contain provisions defining the common areas and individual units or lots, impose a covenant for the collection and imposition of assessments, grant the association the right to enforce the covenants, grant and reserve certain necessary easements, provide a mechanism for amending the CC&Rs, and detail insurance requirements. CC&Rs should contain dispute resolution procedures and establish an architectural review committee and process.

In addition, CC&Rs should reflect the unique characteristics of the association and can deal with issues involving rental restrictions, parking, storage, rights and responsibilities with respect to exclusive use common areas, and FHA and other mortgagee protections. CC&Rs can lay out the distinctions between “special assessments” and “regular assessments” and other matters which should not be easily modified because of the whim of a current board. CC&Rs should be reserved for legally mandated provisions and such other guidelines that your association views as fundamental to maintaining a neat, peaceful and flourishing community.

At the end of this year, the Davis-Stirling Act will undergo a major restructuring. Existing CC&Rs which attempt to recite the current law will become technically outdated on January 1, 2014. This is a good time to review your CC&Rs and consider simplifying them and making them relevant in light of the changes that have occurred in your association since the developer adopted them without the foresight of what was to come. You can create a meaningful modification that will create an instrument which will remain accurate and relevant for many years, if not decades. 

Remember, as with most things in life, the key is simplification…….and you heard that from a lawyer!

Ted provides comprehensive legal services for community associations. Ted’s expertise in real estate, corporate law, employment law and the Davis-Stirling Act combine to provide the most effective and efficient representation of his HOA clients. He has a wealth of experience in this field and advises his clients on the challenges of association management.

Ted has vast experience in amending, restating and interpreting association governing documents, including CC&Rs, bylaws, election rules and rules and regulations. He also assists his HOA clients with the enforcement of violations of association governing documents and provides collection strategies. Ted has counseled a wide array of community associations, including condominiums, planned developments, stock cooperatives, communities with common area recreational facilities, sub and master associations, age-restricted communities and senior communities and mixed-use associations.