HOA & Statutory Law

In California the Civil Codes governing HOAs are often referred to as The Davis-Stirling Act. Several sections of that Act fail to provided any punishment for violating those sections. The law firm of Berding & Weil posted an article, "What Happens When Boards Violate the Davis-Stirling Act". Of immediate interest to me is what happens if Boards violate the sections of the Act that deal with Reserve Studies and the spending of reserve funds for such items as taxes. I would greatly appreciate your opinions and experience, both in California and other States, regarding this subject.

It appears to me that the only explicit punishment that Davis-Stirling provides is the $500 fine for each improper denial of a records request. See https://www.davis-stirling.com/HOME/Statutes/Civil-Code-5235#axzz2CR2ljirY . I happen to think the latter is pretty powerful. I wish my state had this punishment.

Else I think that enforcing Davis-Stirling is typically done by seeking injunctive relief in court. Sometimes attorney's fees will be awarded to the successful plaintiff. See https://www.avvo.com/legal-answers/what-ca-dept-or-agency-enforces-the-davis-stirling-1802376.html

This is a passage from an attorney from the link Augustine provided:

An HOA is not a business so govt agencies that govern businesses will not take action. Also, in CA, the HOA does not have a choice in how it incorporates--it has to be a non-profit corporation. There is no government agency that enforces Davis-Stirling. You would have to hire an HOA attorney, and if he/she feels you have a case, the attorney can file suit. As I stated above, in CA, HOAs operate as non-profit corporations. The California Secretary of State can only take action such as suspending their corporate status if they don't pay the required fees and they don't file their required forms. It has nothing to do with DSA.

Sorry, this is kind of the answer many attorneys will give, uninformed. First, an HOA is a business. Second, the Attorney General will take certain cases based on their criteria.Here is a link to their specific page regarding HOA's, https://oag.ca.gov/consumers/general/homeowner_assn. What you described, would not fall under their jurisidiation. Third, the Secretary of State will post suspended status for not fling certain forms that they require, but will also do so for the Franchise Tax Board.

Someone's belief that suing your HOA is suing yourself is pure BS. If you have the money, some Boards need to be taught a lesson before they get out of hand. I manage HOA's for a living, but find that the CCRs put in for the development are not worth the paper they are written. I suspect that more than 75% of the CCRs put into place at an HOA are just boilerplate documents they got from a law firm. All; they did was plug in the Association name and filed and recorded with the counties. Most Board members have no idea what they are doing and in a number of instances, they are in the position for personal reasons. Speaking for California only, there is no educational or ethical qualifications for being a Board member. There is NO oversight of the industry and there really nothing that can be done if you have a poorly run complex except to gather enough like minded volunteering as a block or slate of candidates to gain a voting majority of the Board.

My opinions, based on personal experience.

If you borrow from the reserves, that is the Board's right. But, it must be approved in open session with a resolution stating how it is to be repaid within the 12 month period.

IMHO, you shouldn't be a Board member!

Don't have too! Unless otherwise worded, you first forward civil and corporate code.

As Richard insists, CA Corporations and Civil Codes supersede your CC&Rs, Warren. It seems to me that your board can find a legal way to borrow the tax-due $$ from reserves, pay the taxes, and pay back reserves.

I'd be opposed to your board taking funds from reserves for operating expenses. What is it with your board, which includes you, that you can't straighten out these accounts so that they're not so messed up? You want to break the law, Warren, but I'd be siding with the other directors in your case.

Matters NOT AT ALL whether you disagree.

Y'all must follow the law.

Failing to follow KNOWINGLY is MALFEASANCE and opens the directors to personal liability which will NOT be covered by any D&O insurance in place.

The wild west is long gone, put away the six shooter and obey the law.

Most CCRs in California already have that provision for D&O and Fidelity insurance. That provision is for the ones that didn't have the provision already in their CCRs. I have seen cases where an HOA was sued and lost when they didn't carry the proper insurance as required, not by law, but by ones' CCRs.

NOT TRUE

I'm learning from RoyP's & Richard's debate, but want to return to Warren's remark: "I appreciate that our past Boards have managed the Association by relying on what they viewed as good business judgment rather than California Civil Code."

There's specific CA corporate code that deals with "business judgment." And it shows that the board may rely on experts in certain fields before proceeding as a part of their "due diligence." We don't even need an expert to tell us that CA HOA boards may not remove funds from reserves except for the maintenance repair & replacement of items listed in the reserves study. The limitations are crystal clear in Civil Code.

But what if the Board sought the advice of a certified reserves analysts--an appropriate expert. S/he would write the same as the above. If the board proceeded to use the funds illegally, they would NOT be practicing "good business judgement." They wouldn't simply be making a "mistake." They'd be purposely ignoring the code and an expert's advice. They'd be guilty, as RoyP points out, of malfeasance.

A couple of points. 1.The Board did rely on the advice of a CPA when they forgave a loan from the reserve fund. 2. The Davis-Stirling Act of course allows for borrowing from the reserve fund to meet underfunded operating expenses. 3. The Act then provides for repayment of the loan or documenting why the loan is not being repaid. 4. As I read the Act, Boards could continue year after year to document why they decided not to repay the loan. Some folks have claimed that there is a stated two year limit on such a procedure. Did I miss something here? 5. For those California responders, I suggest that you read AB-2912 and the resulting change in the Davis-Stirling Act. I believe you will find significant changes in the added Section 5806. I also expect that your HOA will discover that Insurers who offered a more traditional Fidelity Bond may not offer one that meets the requirements of Section 5806. Our HOA carries a $1,300,000. Fidelity Bond that only covers our BODs. Our management company bonded their own employees. The cost for us has been approximately $1,000. per year. We have received a quote from that same insurer for a $1,300,000. bond meeting the requirements of Section 5806 for a cost of approximately $5,300. So if yours is a larger HOA with a larger reserve account you are likely to be paying much more for your new bond.

Legal or not, the Board did forgive a loan from the reserves to cover operating costs in 2017. Great minds think alike. Only joking, however, I have sent an email to our manager and the chairman of the finance committee suggesting that we suspend payments to the reserve fund until any borrowed funds are repaid. On the surface this seems like a logical action as our reserve fund is approximately 140% funded. This over funding is a temporary condition as the HOA has committed to some major improvements/additions. Thanks for the suggestion.