Delinquent/Suspended Corporation (CA)

Started by MeganH1 • 13 replies • 277 views

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MeganH1 (California)
Posts: 16

Posted:

Hi everyone. I posted a question awhile back but have another.

It has been brought to the current Boards attention that our incorporation status was delinquent and then suspended after 60 days for a period of nearly 2 years. This has only been recently been corrected. During that period of suspension the previous Board continued to operate in a concerning manner that has potentially opened us up to further liabilities. I am not sure if the HOA is liable or if the individual board members are personally liable, we have been told both is a possibility by our association attorney.

To give a little background information:

Our HOA did not hold an annual meeting for over 2 years nor did they hold an election for 3 years. When an election was held in 2022 it did not follow the current election rules so the results were voided and the previous board was reinstated on advice from our association attorney. While our status was suspended with the Secretary of State the previous board insisted we needed to raise dues in excess of 20%. Initially this was done by acclamation at a virtual meeting which the Board acknowledged 24 hours later was not allowable and that it was supposed to be voted on by means of a secret ballot. The very next day a member of the Board supposedly sent out secret ballots to membership stating they needed to be returned within 7 days. No inspector of elections was appointed and the ballots, if they even existed as I did not personally receive one myself, were supposedly opened and tabulated privately by the then board at their homes. The monthly assessment increase in excess of 20% was specifically to enter into a contract with a management company.

Some of our owners are demanding a refund of the increase in dues they've paid over the year after finding out that the previous board violated the election rules, tampered with association records and entered into a contract they had no authority to do so when our incorporation status was suspended. Some owners have outright refused to pay the dues increase because of this as well and their accounts have been incurring late penalties and interest charges. One or more owners have also filed complaints with the Attorney Generals Office in my state because of the aforementioned.

We have been told by the association attorney that our contract with management is voidable but only voidable by the management company. However, we've been given contradictory advice regarding the increase in assessments. Is there a statue of the Davis-Stirling Act that covers this? We are trying to avoid being sued and don't have the funds to reimburse all owners as we have spent a considerable sum on legal counsel already. We were told we could reimburse the members complaining to quiet them up and hope no one else catches wind of this or reimburse everyone and write off the loss as "bad debt". It has also come to the current boards attention that the previous board directed the management company to send the delinquent accounts to a collection agency which attempted to collect and then came back and said they were unable to validate the debt and declined any further attempts to collect. The management company then sent out (nonitemized) invoices to the delinquent accounts attempting to collect payment with included the collection agencies fees despite the collection agency is no longer representing our HOA in this matter.

Has this ever happened to anyone elses HOA and if so, what did your HOA do to rectify the situation?

AugustinD
Posts: 1,027

Posted:

MeganH1,

-- The suspension of a corporation by the California Secretary of State does not invalidate the covenants. A little support for this appears here: https://www.davis-stirling.com/HOME/S/Suspended-Corporation . You are mistaken in thinking that, just because a corporation is "suspended," a board can no longer perform its duties and everything just disintegrates. Not so at all. Corporations can even be "administratively dissolved" by a state and still, per statutes, continue doing certain business.

-- Because the covenants are contractual terms and exist regardless of what status the corporation has, the HOA still has the legal right to enforce the covenants.

-- Regarding the Board: Most likely California statutes say that a prior board continues until successors are elected or appointed. If the 2022 election was not done right, then it makes sense for the prior board to continue. Though since it is still 2022, I wonder why no one is trying to make another attempt at a proper election.

-- Those objecting to the quite large assessment increase (which being this large, required a vote of owners): Their first step under California statutes is to seek Internal Dispute Resolution (IDR). Do you know what this is?

-- I agree with the attorney that there are problems with terminating a contract with an MC for the reasons you give.

-- Owners always have the option of doing a recall of directors and installing others as directors. This would make more sense than filing a lawsuit.

-- It sounds like you have owners that do not realize that, "Someone has to run the joint." Are the owners who are so unhappy willing to serve on the board? If so, then in my experience this is their starting point. If they are stupid enough to try IDR (and more, per statute), landing in court, then I hope they spend so much money on attorneys that they are soon bankrupt. Factor in that all the owners will have to pay the HOA's attorney.

-- I am throwing a lot of law your way. If you do not understand any of the above, explain what is confusing you, and ask another question.

MeganH1 (California)
Posts: 16

Posted:

Thanks for your response.

I'm not sure what state you're in but in California if we are not in good standing with the Secretary of State we lose the ability to exercise corporate powers, rights, privileges and contracts. We cannot enforce our governing documents or collect delinquent assessments either. We also can't bring action or defend ourselves in those circumstances. I know this is covered by Timberline, Inc v. Jaisinghani (which is referenced at the bottom of the link you provided) which clearly states "“…[E]xcept for filing an application for tax exempt status or amending the articles of incorporation to change the corporate name, a suspended corporation is disqualified from exercising any right, power or privilege.” Even though we are a mutual benefit corporation we still are a corporation. Is there any case law that would supersede Timberline, Inc v. Jaisinghani? To be honest, I think the association attorney suggested refunding the members complaining to quiet them up as it would be cheaper.

We hired an inspector of election company for our latest election (but not for voting on the monthly assessment increase greater than 20%). A majority of the board were eventually disqualified after being elected as they were not owners. We had to utilize appointment powers to appoint the spouses of the previous board despite one of the owners that has been objecting to the manner in which our association is run had submitted their name for appointment and we had other owners that received votes during that election. The management company advised us that the owner that voluntary submitted their name for appointment should be ignored. The other remaining board member did not want to appoint the objecting owner nor the actual owners that had received votes. The HOA can't feign ignorance of these election laws so they've been trying to ignore it and against the advise of counsel (and also at the behest of the management company because it's money they're taking from us and they have no intentions of voiding the contract). Basically what I'm hearing is that it's easier to scoff our governing documents and state laws hoping by then the HOA will be able to foreclose on these owners and that will make the problem magically go away (it won't).

Our attorney said that the owners can skip IDR with us regarding the dues increase in excess of 20% and go straight to filing in small claims seeking restitution, declaratory and equitable relief while also demanding a $500.00 penalty for each offense and overturning the dues increase. I've found nothing that would prohibit them from doing so either in our governing documents or state law. The ballots in question, which I'm not sure ever existed, are not part of our association records (I've checked and if it had been done by the letter of the law the ballots would have been kept in the possession of the inspector of elections for 1 year). I'm told the previous board that opened them threw them away afterwards. Not sure if it matters because they weren't suppose to be opening them anyway and giving 7 days for a return period doesn't follow our states election rules either. The answer I've received from the previous board was along the lines of, "I knew it wasn't right but don't care." Our insurance has also not given us a definitive answer on whether we would be covered, worse during this period we were not carrying all the required insurance either.

I think the owners objecting are fed up and have tried to make positive changes only to have everything get worse (I wanted to appoint at least one of them but the other board member refused) and they would "run the joint" but the Board largely has been the same few families running it for years much to the detriment of everyone else. I can understand why they are frustrated too. They've tried to do everything the correct way only to have the Board and previous Boards violate our covenants and laws and tell them "tough luck". I'm not even sure our election where we used an inspector was legal at this point, it truthfully seems like it was an expensive farce. On top of that, one of the previous board members told the entire association in writing that the monthly assessment increase in excess of 20% to hire a management company was specifically to harass the owners that had been objecting to the manner in which our association was run. We have no reserves and over 20% of our funds are solely going to this management company that is advising us to increase dues again and impose a special assessment on the sly later in the year (despite our annual budget disclosure said there would be no special assessment). The management company also put together our 2023 annual budget disclosure with inflated numbers in order to justify another monthly assessment increase and said that if no one notices it's okay... Our monthly assessments by 2023 will be nearly 60% more than what they were in January 2022 and we will still have no reserves. Part of the owners complaints are that this is a breach of the boards fiduciary duties as we couldn't afford a management company to start with and that the monthly assessment increase should've gone to fund the reserves. I would say we were better off without this management company because they've truthfully just made things worse.

I believe the other owners would be happy if these handful of bad players within our association that have ran this place into the ground were held personally liable. I am also tempted to join them myself because my suggestions of obeying the law are falling on deaf ears.

MaxB4
Posts: 3,513

Posted:

Megan,

To clarify some of the items Augustin brought up.

1) The association, while suspended, loses its legal right, meaning litigating CCRs violations. They can be sued, and cannot defend themselves. They can not bring a legal suit against anyone.

2) The management contract can be terminated based solely on the termination clause of the management contract itself. The management company can terminated based on the fact the corporation was suspended.

3) Any monies collected by the association by the fraudulent election need to be returned. Now that the association has its corporation status updated, you could and should be sued by owners for how the election was held.

4) You need to immediately find a competent MC to fix this mess or your legal bills so far will seem small compared to the legal storm potentially brewing in the future.

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By MeganH1 on 11/10/2022 2:52 PM
I'm not sure what state you're in but in California if we are not in good standing with the Secretary of State we lose the ability to exercise corporate powers, rights, privileges and contracts. We cannot enforce our governing documents or collect delinquent assessments either.

Nowhere does the site I linked say that covenants may not be enforced.

Set aside "the association" for a minute, and keep in mind that covenants bond one owner to all the other owners. One owner may certainly sue another owner to enforce the covenants.

But I see that I missed that the Association itself, in its suspended status, may not bring suit.

However, currently the Association is not suspended.

What some owners there are concerned about is what happened during the period of suspension, right? These owners appear to want to get rid of the management company. They're outraged, and maybe rightly so.

I think all your group's concerns are best remedied via seeking a recall; following the statute's requirements for getting lawful elections run; and following up as needed with IDR et seq. and then litigation, if necessary.

I hear you that the entrenched directors are not cooperating. You have an attorney. Follow his/her counsel.

Quote:

Our attorney said that the owners can skip IDR with us regarding the dues increase in excess of 20% and go straight to filing in small claims seeking restitution, declaratory and equitable relief while also demanding a $500.00 penalty for each offense and overturning the dues increase.

Are you asking people here to double check your attorney's claims above? Have you located where the California HOA/COA statute imposes a $500 penalty "for each offense"? I am not sure that exists, but it might. I know there are penalties in California for denying records.

Are you looking for a cheaper way to get action? I do not blame you. Keep reading at this forum, and you will see what a boondoggle many HOAs/COAs are. This is largely due to unpaid, unskilled volunteers being at the helm. Worse, this is per statute and the covenants.

One good thing about California HOAs/COAs is the statutorily required open forum sections of Board meetings. Is your group attending these and presenting its concerns to the Board? Sometimes the pressure on directors from such criticism can drive directors to resign.

MeganH1 (California)
Posts: 16

Posted:

The HOA has received written complaints objecting to what I have highlighted in my posts, some of these members have also attended the few "meetings" held since this summer but I would not describe it as open meetings since they are exclusively virtual with no physical location for people to attend. The "meetings" are run by the management company who will mute the attendees. We have also received complaints to the management company (who is the HOAs agent for service) regarding our non-compliance with the Open Meeting Act, these complaints were ignored.

We have only in recent months corrected our filings with the Secretary of State to be back in good standing. We were suspended for much of 2020, all of 2021 and some of 2022. 90% of the current issues raised recently occurred while our status was suspended. Some of the issues (or rather complaints) are that the HOA was charging late fees and penalties on monthly assessments (that they believe were fraudulently raised) while the HOAs status was suspended. The HOA also did not send out the collection policy annually as required by the Davis-Stirling Act and a majority of these monthly assessments were either paid in full and on time (before the 15th of the month) but the treasurer had been declaring them late by the 10th of the month (and sometimes the 2nd). This is one of the reasons why the collection company that management hired after a vote by the previous board in executive session declined to collect on the debt, however, they still added their fees onto it which the management company is now trying to collect on. Understandably, some of the owners don't feel they should have to pay that and our delinquent accounts are mostly compromised of these late fees, interest and management fees. For example, some owners that refused to pay the monthly assessment increase (but still continued to pay what was our previous monthly assessment amount) are being invoiced for that (approximately $1,000) and also a few hundred dollars in late penalties, interest and well over a $1,000 in "management fees" for collection (both from the management company and the collection company that eventually declined to collect). These fees total more than the amount the HOA claims is owed to them. The collection company also specialized in HOA collections too and was licensed as a debt collector. Our management company is not a licensed debt collector.

I'm almost at the point of letting these people be torn to bits by the owners. I suspect the obscene phone calls I've recently received are probably friends or family of these shady board members. I'm not sure the purpose of them or if they think I'll find it intimidating.

Thank you everyone for your responses.

MaxB4
Posts: 3,513

Posted:

Megan

Being that you were self=managed, I assume you are an association under 100 units. Before of some of the complex statues and legal requirements in operating an association, you should have management, maybe just financial, that will also keep you out of trouble and compliance with state disclosure regulations.

AugustinD
Posts: 1,027

Posted:

Can you clarify: Are you asking what you can do as a current director on the board?

I cannot tell if you are a member of the group of disgruntled owners, or are a disgruntled director (now talking to an attorney that is not the HOA/COA attorney?).

Quote:

[The HOA corporation was] suspended for much of 2020, all of 2021 and some of 2022. 90% of the current issues raised recently occurred while our status was suspended. Some of the issues (or rather complaints) are that the HOA was charging late fees and penalties on monthly assessments (that they believe were fraudulently raised) while the HOAs status was suspended.

I think you need to get the owners up to speed on the reality that, even with the corporation suspended, the covenants still require owners to pay assessments. While suspended, the HOA cannot take them to court to force payment, but the HOA can use any other lawful means permitted to collect assessments.

The covenants are contractual terms. However, I expect most owners bought into the HOA when the corporation was not suspended. This is another reason the covenants still legally bind the owners to pay their assessments.

Any owner opining from the cheap seats had best realize that their position is no slam dunk. Hackneyed but true, disputes like this go to court, and then everyone but the attorneys loses. Plus there is a great drain on emotions and people's time.

Quote:

The HOA also did not send out the collection policy annually as required by the Davis-Stirling Act and a majority of these monthly assessments were either paid in full and on time (before the 15th of the month) but the treasurer had been declaring them late by the 10th of the month (and sometimes the 2nd). This is one of the reasons why the collection company that management hired after a vote by the previous board in executive session declined to collect on the debt, however, they still added their fees onto it which the management company is now trying to collect on. Understandably, some of the owners don't feel they should have to pay that and our delinquent accounts are mostly compromised of these late fees, interest and management fees. For example, some owners that refused to pay the monthly assessment increase (but still continued to pay what was our previous monthly assessment amount) are being invoiced for that (approximately $1,000) and also a few hundred dollars in late penalties, interest and well over a $1,000 in "management fees" for collection (both from the management company and the collection company that eventually declined to collect). These fees total more than the amount the HOA claims is owed to them. The collection company also specialized in HOA collections too and was licensed as a debt collector. Our management company is not a licensed debt collector.

I continue to come back to replacing the board. Then these unhappy owners can seek refunds.

I know it will be hard. But filing suit and going to court is much harder.

If you are on the board get your position on record. Ask that topics, of your wise choosing, be placed on the agenda, and be ready with motions to make on these topics. Show the owners where you agree with them and where you do not agree with them. Point out that the covenants still bind them to pay the assessment, regardless of the status of the corporation with the California Secretary of State.

I am sorry you are being abused.

MeganH1 (California)
Posts: 16

Posted:

Hi Max,

We do have a management company, they've made things worse... I've dug into them a little bit and found that they're being sued by a large local medical complex for a slew of things because of their "management" (fraudulent billing being a big one, ex. billed complex for new HVAC system that was never installed, let the place fall into disrepair while charging for its upkeep and were intentionally evasive and non-responsive to inquiries to name a few.) I did not select this management company nor did I vote to increase our monthly assessment to hire them (I never actually received a ballot myself). Couldn't tell you why the previous board selected this company (not that they had the authority to do so) because they're terrible or if it's just a coincidence that a terrible HOA and a terrible management company would stumble upon each other. Either way, I definitely feel we are up crap creep with neither a paddle and the boat is taking on water.

MeganH1 (California)
Posts: 16

Posted:

I don't disagree that we all have to pay assessments, it's a matter of what the assessments are and how we have arrived at what is currently being claimed as our current assessments. Eventually more will have been spent in legal consultations than just writing this off as bad debt. I'm starting to find that a lot of the actions of the management company and these few families controlling the board are extremely predatory. In a past life part of my job duties involved investigating fraud. I'm accustom to people trying to run a racket, I've just frankly never seen such blatant actions. Most scum at least try and cover their tracks initially and they generally have enough sense not to admit in writing their wrongdoing unless they think it'll get them preferential treatment. I'm not sure how far this goes back either, perhaps a decade? The treasurer relieved our HOA of a lot of association records, why they had them instead of the secretary I don't know either. I've looked through what records the association does have and a fair amount were hand written notes on the backside of junk mail, some candy wrappers and very old receipts.

I don't see a recall as being possible or a new election being held either. California might be in the minority but it allows for injunctive relief in small claims under a few narrow sections and one of those pertains to HOAs (the others being like an innkeepers lien that wouldn't concern us).

MaxB4
Posts: 3,513

Posted:

Megan

I consider myself and my company an association management company, not a property management company. We don't manage property, but communities. The laws pertaining to commercial real estate and residential rental are night and day different from HOA management. Fortunately, in California, rules for PUD's and Condos are the same. We just have to deal with Corporation Code and the Davis-Stirling Act with the Civil Code.

As far as recalls, in 14 years of experience, they are a waste of time and energy. IF, and that is a big IF, if you can get the powers to be to hold an honest elections, run a slate of qualified and willing candidates against the scum bags you have now.

As far as courts, too many judges or commissioners hate HOA's so the past few years I haven't seen many homeowners with too much success going down that path.

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By MeganH1 on 11/10/2022 5:06 PM
California might be in the minority but it allows for injunctive relief in small claims under a few narrow sections and one of those pertains to HOAs (the others being like an innkeepers lien that wouldn't concern us).

-- Regarding election disputes (including enforcing election covenants and election statute sections), it appears to me that (1) the statutes require internal dispute resolution (IDR, to be distinguished from ADR) followed by (alternate dispute resolution (ADR) (if IDR was not successful); and (2) the court that must be used for your particular election dispute is California Superior Court (not small claims court). See

https://www.davis-stirling.com/HOME/Statutes/Civil-Code-5925
https://www.davis-stirling.com/HOME/H/HOA-Pre-Litigation-ADR
https://www.davis-stirling.com/HOME/S/Small-Claims-Challenges

-- Regarding assessment disputes, owners must first attempt resolution outside the courts, using either IDR or ADR. See https://www.davis-stirling.com/HOME/D/Disputed-Charges

-- For California HOAs/COAs, small claims courts have only limited authority for granting injunctive relief, meaning there are only a few topics where small claims court can grant injunctive relief. See the sites above and also California Code of Civil Procedure 116.220

-- If the HOA is not cooperating with the statutory, detailed procedures for IDR or ADR, then in court this is a huge point in favor of those owners raising the dispute.

MaxB4
Posts: 3,513

Posted:

I don't think Augustin understands how IDR works in California. If you have to take a case to Superior Court, make sure you have $20K to burn, which would make him happy.

AugustinD
Posts: 1,027

Posted:

Internal dispute resolution is required before going to court where the statutes say thusly. If one lands in court, a failure to attempt resolution through IDR may be a fatal error.

The whole point of IDR is to reduce the load on the courts. An owner would be stupid (lost really) not to follow the statutes when it comes to IDR requirements.

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