Fiore Racobs & Powers, Author at Fiore Racobs & Powers, A PLC

Assessment Collections: Debt Collection Licensing Requirements under SB 908

By: Laurie C. Keating, Attorney at Law, Fiore Racobs & Powers, A PLC, Orange County Office

If debt collection was not already exciting enough, effective January 1, 2022, debt collectors will now need to obtain licenses due to SB 908. A “debt collector” is defined in the Rosenthal Act, and includes anyone who, in the ordinary course of business, regularly collects a debt on behalf of themselves or another party. Collection of assessments is considered to be “debt collection,” and so self-managed associations and management companies will now need to obtain a debt collection license.

In order to enforce the new requirements, this bill allows the Commissioner of the California Department of Business Oversight to establish a licensing scheme, adopt rules, and investigate violations of the Rosenthal Act (which is the California – specific debt collection legislation). The new licensing regulations require an application and a fee, imposes reporting and examination requirements, and requires the maintenance of a surety bond of at least $25,000 by debt collectors. There is also an annual fee that debt collectors must pay, which will be a pro-rata share of the cost of administering the licensing and oversight program, with a minimum fee of $250. If debt collectors are investigated, the commissioner may also charge them for the time spent on the investigation.

Obviously this is intended to increase oversight of debt collectors, though debt collectors were already subject to civil lawsuits for alleged violations of the Rosenthal Act. Disgruntled debtors, regardless of whether they have a legitimate complaint, will now have the ability to both file a complaint with the commissioner and pursue a civil lawsuit. This would potentially cause the association and/or management to incur significant expense defending such claims. Those costs will then be passed along to the association and ultimately to the delinquent homeowners.

In addition to the more broad-strokes requirements, this bill also adds a couple of smaller requirements. This includes a requirement that debt collectors identify themselves when they make a phone call, and include their license number in 12-point type on written communications with debtors.

While consumer rights advocates will likely cheer for this new bill, it is not as beneficial as it might seem for debtors, as the increased costs will ultimately be passed along to and harm debtors.

Elections: SB 323

A Brief Overview

Senate Bill 323 (Wieckowski) introduced significant changes to the election process for residential common interest developments. The important changes include the following:

Qualifications that must/can be imposed on candidates for election to the Board. The legislation imposes one mandatory candidate qualification on all residential Associations and lists four permissive qualifications that an Association could decide to implement for candidates.
Limits on suspension of member voting rights. Members that are delinquent in the payment of assessments cannot be denied a ballot.
New documents/lists are required. (Voter List and Candidate Registration List.)
The legislation introduces two new general delivery notice requirements for election of directors (the “Candidate Registration List” notice and the “Nomination” notice). Ballots still need to be mailed out at least 30 days prior to election. However, now a Candidate Registration List notice must be provided at least 30 days prior to the ballots being mailed. Further, at least 30 days prior to the Candidate Registration List notice, an Association will need to provide the Nomination Notice. Planning for and implementing these new notice requirements will lengthen and complicate the election process.
Associations must permit members to verify the accuracy of their information on the Voter List and Candidate Registration List at least 30 days prior to the ballots being mailed. The Association or member shall report any error to the inspector of elections who is required to correct the error within 2 business days.
New provisions granting a member the right to transfer voting rights via general power of attorney.
Inspectors of elections cannot be under contract for the provision of services to the Association (except a contract for provision of inspector of election services).
Limits on when the election rules can be amended (no amendment less than 90 days prior to an election).

Legal Update: Parth – Trial Court Decision

Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268

Case Summary

In 2016, the Court of Appeal released its opinion in Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268, causing much discussion in the common interest development industry. The Court of Appeal reversed the trial court’s grant of summary judgment in favor of defendant Erna Parth, finding that there was a material issue of fact whether Mrs. Parth “acted in an informed basis and with reasonable diligence” and was therefore protected from liability by the “Business Judgment Rule.” The Court of Appeal reviewed the alleged actions taken by Mrs. Parth, which included authorizing contracts, hiring an unlicensed contractor, signing promissory notes, and terminating the management company, all without board approval. She also signed a contract with a security company even though the Board had voted to obtain bids from other security companies. The Court of Appeal remanded the case to the trial court for further proceedings.

On October 9, 2018, following a 25 day court trial, the Superior Court, the Honorable James T. Latting, Judge Presiding, issued its ruling in favor of Mrs. Parth.

Judge Latting first noted that Mrs. Parth is 89 years old and a former volunteer member of the Board, which consisted primarily of retirees; that Mrs. Parth had no formal training to serve on the Board of Directors and did not have a business background. During her service on the Board, the Association employed professional management, and the Association had legal counsel the entire time she served on the Board.

Expert testimony for both the Association and Mrs. Parth indicated that it was “custom and practice” for boards to rely on professional management, in particular managers holding the CCAM designation, for advice on issues such as whether the Board was in violation of the governing documents, or whether a legal opinion should be sought. The three managers assigned to the Association between 2005 and 2001 all held the CCAM designation. Mrs. Parth also relied on director ApRoberts, a CPA, regarding the Association’s financial affairs.

With regard to the allegations that Mrs. Parth acted unilaterally and without approval, the court found that the Association did not present supporting evidence. Mrs. Parth did not unilaterally hire Warren Roofing; she was one of five directors who made that decision. She relied on management to review and approve invoices for the work, which it was obligated to do under the management contract. Similarly, Mrs. Parth did not unilaterally sign loan documents; the loans were approved by the Board, and there was no evidence that management advised that a vote of the members was required, or that legal counsel should review the loan documents.

The court also found that Mrs. Parth did not unilaterally retain Jesse’s Landscaping and did not unilaterally process payments; instead the management company did so. And there was no evidence that Mrs. Parth unilaterally fired the management company.

Finally, as to the patrol contract Mrs. Parth signed that prompted the lawsuit, the court found that Mrs. Parth believed she was merely renewing the contract, not “entering a new deal,” and that she signed at the request of the manager.

Based on the evidence presented, the court concluded that Mrs. Parth did not act in bad faith, or in her self-interest, and was protected by the Business Judgment Rule and the indemnification provisions in the governing documents.

Takeaway

Despite the outcome in the trial court, the 2016 Parth opinion provides a lesson in how to comply, or not comply, with the Business Judgment Rule. The trial court decision is not legal precedent, but makes it clear that board members are entitled to and should reasonably rely on the advice and recommendations of managers and the management company as experts.

Case Law: Heron Bay Homeowners Association v. City of San Leandro

Heron Bay Homeowners Association v. City of San Leandro (2018) – 19 Cal.App.5th 376

Case Summary

Halus Power Systems sought approval from the City of San Leandro for a zoning variance to construct a 100-foot-tall wind turbine on an industrial parcel. The property is located in an estuary, where many species of waterfowl and shorebirds, including threatened or endangered species, reside. The property is also roughly 500 feet from the 629-unit Heron Bay residential development. The city approved the construction of the turbine, finding that the significant environmental effects of the project could be reduced to insignificance through mitigation measures. The Heron Bay Home Owners Association filed suit under California Environmental Quality Act (CEQA), asserting that the city needed to prepare an environmental impact report (EIR) for the project.

The trial court entered judgment in favor of the Association. The Association then requested an award of attorneys’ fees under California Code of Civil Procedure section 1021.5, which authorizes an award of attorneys’ fees to the prevailing party in a case that enforces an important right affecting the public interest. The trial court awarded the Association only part of the fees it sought, finding that the Association “had a significant financial incentive to initiate the litigation,” since the Association members had brought the suit in part because they feared the turbine would cause their property values to decrease. However, it also found that they were also motivated by “non-pecuniary” concerns for the project’s impact on wildlife, aesthetics, health and noise levels. As a result, the court apportioned financial responsibility for their attorneys’ fees during the administrative proceedings entirely to the Association, but because of the “different risks and much larger financial commitment” of CEQA litigation, it divided equally the responsibility for the fees the HOA incurred for the litigation between the HOA on one side, and the city and Halus Power on the other.

Halus Power and the city appealed the award of attorneys’ fees, arguing that a fee award was not appropriate because the value of the benefit to the members of the Association (i.e., maintenance of their property values) far exceeded the financial burden of litigation. However, the Court of Appeal found that any financial benefit to the homeowners was speculative since the litigation was not certain to prevent construction of the turbine or even change the project, and preservation of property values was not immediately or certainly “bankable” and that fees could be apportioned because the record supported a finding that the Association’s motivations were not purely financially self-interested.

Takeaway

Trial courts have considerable discretion in awarding and apportioning attorneys’ fees under Section 1021.5 based on the particular facts of each case. More importantly, it makes it crystal clear that CEQA plaintiffs that might avoid a decrease in their property values by successfully challenging a project are not cut off from recovering section 1021.5 attorneys’ fees. Also, before initiating an action regarding an offsite issue, check the governing documents to make sure association is authorized to use association funds.

Case Law: Artus v. Gramercy Towers Condominium Association

Artus v. Gramercy Towers Condominium Association (2018) – 19 Cal.App.5th 923

Case Summary

The Association sought to amend its bylaws to eliminate cumulative voting. The Association’s Board distributed the secret ballots and sent a two-page letter soliciting membership support for the proposed amendment and providing the Board’s rationale for the amendment. The Association also posted neutral notices in the elevators urging members to vote. At the time, the only complaint made by the plaintiff was that Association materials were used and that members who opposed the proposed amendment were not given an opportunity to post their own messages in the elevators.

The election proceeded and the vast majority of voting members approved the amendment. A month later, the plaintiff filed a lawsuit against the Association alleging, among other things, that the Association did not give all members an opportunity to be heard and that it appointed an interested inspector of elections. The plaintiff also sought preliminary injunctive relief to prevent the implementation of the amendment. In granting the preliminary injunction, the trial court found there was sufficient evidence that the Association: (1) failed to provide equal access to Association communications for those members with opposing views and (2) used Association funds for “campaign purposes” in enclosing the two-page letter with the secret ballots.

Following the issuance of the preliminary injunction, the Association held a second election on the bylaw amendment. The result of the second election was the same as the first election—the membership strongly supported the amendment.

After a three day trial, the trial court found that the plaintiff never asked for equal access to Association media to present an opposing view. (Notably, the plaintiff requested and was granted access in connection with the second election.) The trial court also found that the two-page letter that was enclosed with the secret ballots merely explained the Board’s reasons for proposing the amendment and, therefore, the Board did not violate the prohibition against using Association funds for “campaign purposes.” As a result, the trial court denied the plaintiff’s request for injunctive and declaratory relief, determined that the Association was the prevailing party, and denied plaintiff’s request for statutory fees and costs.

On appeal, the plaintiff argued that the trial court should have granted declaratory relief and that she was entitled to statutory fees and costs because she was successful in obtaining the preliminary injunction against the Association. In affirming the trial court’s judgment and denial of fees and costs, the Court of Appeal concluded that: (1) there was no actual controversy, especially since the Association corrected any perceived deficiencies in the first election by holding the second election; and (2) interim attorney fees and costs were not awardable.

Takeaway

If a member challenges an election based on a claimed violation of the Davis-Stirling Common Interest Development Act, conduct the election again, removing any potential violations.

DFEH Approves Historic Fair Housing Regulations in California

By: Janet L.S. Powers, Esq., CCAL®, Fiore Racobs & Powers, A PLC, Orange County Office

Today, the Department of Fair Employment and Housing (DFEH) Council unanimously approved the first ever DFEH Fair Housing Regulations for the State of California.

The new DFEH Fair Housing Regulations will become effective January 1, 2019 and will cover such areas as discriminatory housing practices, harassment and retaliation. In addition, the new Fair Housing Regulations will address requests for reasonable accommodations on the basis of disability, assistance animals, and the interactive process, as well as criminal background information use.

These Regulations will specifically reference and regulate all types of common interest developments, including condominiums, and planned developments.

Boards of Directors and managers will need to become familiar with the general requirements of these Regulations and how the Regulations will affect your associations.

Please feel free to contact us for information and educational opportunities.

Janet L.S. Powers is a Senior Shareholder at Fiore Racobs & Powers, A PLC, where she has over 30 years of experience representing community associations. She can be reached at JPowers@fiorelaw.com.

Assistance Animals: Make Sure Your Association Has a Policy in Place

By: Janet L.S. Powers, Esq., Fiore Racobs & Powers, A PLC, Orange County office

An owner comes to a board meeting with a very large white rat sitting on her shoulder. She advises the manager and the board that she requires a reasonable accommodation to her disability, and that the rat is an assistance animal who senses when her blood sugar is low, and alerts her to take her medication. While the manager is on his monthly walk-through, he notices a resident in the pool area with a big white goose sitting on the lounge chair next to him. When asked about the goose, the resident states that this is a comfort therapy goose which is a reasonable accommodation to the resident’s disability of general anxiety and fears of being in public.

When the manager reports these requests to the board, the board is astonished and questions whether and under what circumstances the association should allow and regulate assistance animals.

State and federal fair housing laws require that associations make reasonable accommodations to persons with disabilities, including allowing residents to have assistance animals.

What is a “disability?” It is a physical or mental impairment that substantially limits one or more major life activity. This includes people who have a record of such an impairment even if they do not currently have a disability.

What are “assistance animals?” Assistance animals may provide comfort, therapy, support, or other aid to the person with the disability. Assistance animals generally do not provide a service, and are not trained to perform tasks or other kinds of work for the disabled person.

Assistance animals are not pets and cannot be treated like pets.

What kind of verification can an association require regarding the disability and the need for the assistance animal? An association may require the person with the disability to provide reliable verification from a treating physician, counselor, or other person who knows the disabled person’s condition and is able to provide reliable verification of the disability. The person verifying the disability must also be able to state that the animal provides a reasonable accommodation to that disabled person’s disability.

What types of rules and policies may an association adopt? An association may adopt rules regulating several areas, including the request process, the verification process, the limitations on the approval of the requested accommodation and conduct of the assistance animal in the residence and on common area. Specifically, the rules may provide that the assistance animal can’t be a nuisance, and that the resident or another designated person must clean up any animal waste.

The association may also condition how long the assistance animal may reside at the association. Reasonable limits would allow the assistance animal to remain in the association for as long as the person is disabled and continues to reside in the association.

An association may evaluate the request for the assistance animal and consider several factors regarding whether the request is reasonable, and safe for the animal and the person with the disability. Some considerations may include the size and location of the residence/unit. For example, if the unit is very small and located on the second or third floor of a building without an elevator, the board would want to consider and discuss with the resident any concerns with the number of assistance animals in the unit, and the difficulty that some animals, such as a mini-horse, may have with stairs.

An association may also refuse to approve a request for an accommodation based on the repeated refusal or failure of the person with the disability to provide verification of disability and need for assistance animal/reasonable accommodation. An association should attempt to engage in the interactive process with the disabled person prior to any denial of the request.

Certain rules would violate fair housing laws and should not be adopted by an association, including the following: breed specific or species limitations, number of assistance animals by one unit/residence, additional charges “pet” deposits, or additional insurance. There may be very valid safety and health concerns with dangerous animals, like snakes, or exotic animals and these should be discussed with the person with the disability, and also addressed in the verification process. An association may require separate verification that each animal is necessary to accommodate a disability. Think about the TD Ameritrade ad, where the employee, Gary, needs both a comfort pony and a motivational meerkat to reasonably accommodate his disabilities while at work.

The new California Department of Fair Employment and Housing (DFEH) regulations, which are in the process of public comment and adoption, require that the disabled person and the association engage in the “interactive process” to discuss the request for an assistance animal, and talk about such issues as other residents with “competing” disabilities. For example, if a person with a disability requests a large furry dog as an assistance animal, and the owner of the unit next door has severe allergies, there will need to be a dialog between the association and the persons with the disabilities about how to reasonably accommodate their respective disabilities.

In conclusion, associations should consider adoption of reasonable policies and rules to describe how the request, verification and interactive processes will be handled in order to avoid unnecessary misunderstandings and frustrations in the future.

Janet L.S. Powers is a Senior Shareholder at Fiore Racobs & Powers, A PLC, where she practices business and real estate litigation, and provides representation to common interest developments. She can be reached at JPowers@fiorelaw.com.

Short Term Rentals: There Goes the Neighborhood – Regulating the Growing Short Term Rental Industry

By: Nathan P. Bettenhausen, Esq., Fiore Racobs & Powers, A PLC, Orange County Office

Due to the growing popularity of companies that facilitate short term rentals, such as Airbnb, HomeAway, and FlipKey, vacationers are descending onto otherwise quiet residential neighborhoods for home-based transient lodgings. These short term rentals have become a major issue for cities and homeowners associations alike as a greater influx of vacationers into residential lodgings demand both greater regulations and enforcement efforts. Many cities are also losing larger portions of tourist tax dollars by being slow, or failing altogether, to regulate this new business model. Similarly, homeowners associations are increasingly having to respond to nuisance complaints and address requests to enforce rental restrictions found in their CC&Rs. Nonetheless, the market share of short term rentals continues to grow, and both cities and homeowners associations need to create strategies to address and better respond to unique challenges posed by home-based lodgings.

The Municipal Landscape:

The surge in short term rentals is forcing cities to decide whether to regulate and tax this burgeoning industry or to ban it outright. Attempting to strike a balance between protecting neighborhoods and allowing alienability of property, many cities have passed a wide array of regulations leaving laypersons and lawyers to navigate the regulatory terrain.

Some cities, like Seal Beach, have passed admirably clear and succinct ordinances restricting short term rentals. See Seal Beach Municipal Code Section 11.4.05.135 (“No residentially zoned property, or any portion thereof, shall be leased or rented for a term of 29 days or less for any purpose …”). When challenged, such total bans have received the courts’ blessings. See Ewing v. City of Carmel-By-The-Sea (1991) 234 Cal.App.3d 1579, 1598. However, the online availability of short term rentals in areas that have total bans suggests that, despite the total bans, clandestine leasing continues. The question for cities then becomes whether to ban short term rentals altogether, or instead to capitalize on them.

As cities begin to appreciate the local economic impact of losing what could be millions in tourist taxes annually, total bans may not be the dominant regulatory trend in the future. For instance, with approximately 4,500 “hosts” in Los Angeles alone, Airbnb estimates that its Los Angeles hosts earned a total of $43.1 million, between May 2013 and April 2014.[i] It comes as no surprise, then, that Airbnb recently announced that it is in negotiations with Los Angeles to collect taxes for short term rentals.[ii]

The difficulty in finding a workable middle ground are evidenced by regulations that are anything but straightforward. Many cities have made it challenging to come to grips with the regulations because it is difficult to understand what, in fact, they are regulating. For instance, Laguna Beach laconically regulates short term rentals by only permitting them:

“within the R-1, R-2, R-3, LB/P, C-N, C-1, CH-M, and VC zoning district subject to the approval of an administrative use permit as provided for in Section 25.05.020 of this title and SLV zoning districts subject to the approval of a CUP as provided in Section 25.05.030, issued pursuant to this chapter. …” (Laguna Beach Municipal Code Section 25.23.030.)

Compared with the clarity of Seal Beach’s total ban, Laguna Beach’s regulation is positively thought-defying. Laguna Beach’s patchwork of zoning laws may prove to be too complex and onerous for laypersons to comply—as is the case in many parts of Los Angeles.[iii]

In contrast, Palm Desert enacted new regulations in 2012 that created a streamlined and affordable application process for obtaining a short term rental permit. Not only do the regulations require a $25.00 application fee and a minimum number of days for short term rentals, but they also require that the operator be available 24-hours per day for the purpose of responding within sixty (60) minutes, to complaints concerning his/her guests. Violations can result in $5,000 fines and suspensions or revocations of the permit. See Palm Desert Municipal Code Sections 5.10.010 et seq.

By making the application process more convenient and understandable, Palm Desert helps ensure greater compliance by short-term rental operators—while simultaneously appeasing some members of the community who are uncomfortable with the transitioning character of their neighborhoods. Since the least costly method by which to ensure compliance is through the adoption of a more comprehensible and streamlined regulatory scheme, cities will need to reexamine and revise their zoning and other enforcement codes in order to respond more effectively to the growing popularity of home-based transient lodgings.

Options Available for Homeowners Associations:

As the municipal regulatory landscape continues to shift, where does this leave homeowners associations? Unlike cities, associations cannot enforce rental restrictions in a non-uniform manner without appearing discriminatory, arbitrary and capricious. See Mission Shores Assn. v. Pheil (2008) 166 Cal.App.4th 789, 795. Since associations also have a vested interest in maintaining the residential character of the community and are tasked with enforcing their CC&Rs, they will need to ensure compliance with any existing short term rental restrictions and address any nuisance caused by the short term rentals.

For those associations with CC&Rs that already restrict short term rentals, the California Supreme Court has long determined that such “use restrictions are an inherent part of any Common Interest Development and are crucial to the stable, planned environment of any shared ownership arrangement.” Nahrstedt v. Lakeside Village Community Assn. (1994) 8 Cal.4th 361, 372. Moreover, as the Supreme Court suggested, the enforcement of such restrictions protects the general expectation of homeowners who purchased their homes in reliance on the restriction. See id. at 377.

However, associations must still demonstrate that a rental use restriction is reasonable and “rationally related to the protection, preservation or proper operation of the property and the purposes of the Association (citations removed)” and not arbitrary, capricious or discriminatory. Mission Shores, supra, 166 Cal.App.4th at 795; see also Civil Code Sections 711 and 5975(a). Noting that minimum lease terms help preserve the residential character of a development, the Court of Appeal in Mission Shores summarily concluded that the imposition of a 30-day minimum lease term was not unreasonable, did not violate public policy, and was not discriminatory. Id. at 796. As such, as long as associations consistently and uniformly enforce their CC&Rs’ short term lease restrictions, their enforcement efforts will likely be upheld by a court.

As for those associations that do not yet have CC&R provisions restricting short term rentals, they will have to either amend their CC&Rs or attempt to ameliorate the problems caused by transient housing. Associations can oftentimes satisfactorily address homeowner complaints of annoying and offensive activities caused by renters through their own internal enforcement methods. If, after receiving a complaint, an association investigates the complaint and makes a good faith determination that the activity constitutes a nuisance, an association can discipline the homeowner and/or seek judicial relief.

But since short term rentals are, by their very nature, transient, the misbehaving renter may be long gone before the association even commences its investigation. While this may not have an impact on the association’s determination that a specific activity constitutes a nuisance, it may have an impact on whether the homeowner’s operation of short term rentals can be deemed a nuisance by a court. Accordingly, the more proactive approach would be to amend the CC&Rs in order to reasonably restrict short term rentals. Without such a rental restriction, associations will be tasked with policing an ever growing population of transient residents.

Ultimately, while cities can afford to experiment with their regulatory schemes in order to achieve a balance that will satisfy its own economic interests and address the concerns of the public, community associations do not have that luxury. Associations will need to tackle short term rentals directly or the adverse effects of the rental practice—or else they risk endangering the residential character of their communities.

[i] (Logan, As L.A. weighs regulation, Airbnb touts its economic impact in city, Los Angeles Times (Dec. 4, 2014) <http://www.latimes.com/business/la-fi-airbnb-touts-its-impact-in-la-20141203-story.html> [as of March 13, 2015])

[ii] (Gardner, Airbnb in negotiations with Los Angeles over collecting occupancy taxes, Southern California Public Radio (Feb. 11, 2015) <http://www.scpr.org/news/2015/02/11/49756/airbnb-in-negotiations-with-los-angeles-over-colle/> [as of March 13, 2015])

[iii] (Reyes, Los Angeles gives hosts, neighbors mixed signals on short-term rentals, Los Angeles Times (Feb. 7, 2015) <http://www.latimes.com/local/california/la-me-adv-illegal-rentals-20150208-story.html#page=1> [as of March 13, 2015])

Nathan P. Bettenhausen is a Senior Associate Attorney at Fiore, Racobs & Powers, A PLC, where he practices business and real estate litigation, and provides representation to common interest developments. He can be reached at nbettenhausen@fiorelaw.com.

Orange County Lawyer, Volume 57, July 2015, Pg. 16

“The views expressed herein are those of the Author. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.”

The Janitor Bill: What Associations Need to Know Now

By: John R. MacDowell, Esq., CCAL®, Fiore Racobs & Powers, A PLC, Orange County Office

In 2016, the Governor of California signed the Property Service Workers Protection Act which has been commonly referred to as the Janitor Bill. This Act requires every janitorial services provider with one or more employees and one or more janitorial workers to register with the Labor Commissioner’s Office and renew the registration annually.

On June 27, 2018, the Labor Commissioner’s Office issued a News Release stating that the online registration system is now launched. The release also mentioned that companies who fail to register by October 1, 2018 may be subject to a civil fine, as will any person or entity who contracts with a janitorial employer lacking valid registration. The law also provides that janitorial contractors are required to renew their application annually and provide their employees with sexual harassment training every two years beginning January 1, 2019.

What does this mean for your community association?

Under the bill, most community associations are not considered employers. Employers are companies that have at least on employee and one or more covered workers.
There is, however, a duty for associations to verify registration using the online tool before contracting or hiring any janitorial service provider.
If a community association hires an employer that is unregistered at the time the contract is executed, renewed or extended, it will be subject to fines of $10,000 for a first violation and up to $25,000 for subsequent violations.
Associations’ contracts with janitorial services should require them to comply with the bill and to pay any fines against the association if they fail to comply.
Community associations should verify that the janitorial company is registered with the California State Labor Commissioner’s Office and that all requirements of Labor Code Section 1420 et seq., including but not limited to all regulations, statutes and codes are maintained. The Labor Commissioner’s office also provides FAQs regarding The Janitor Bill and its implementation.

John R. MacDowell is a Senior Shareholder at Fiore Racobs & Powers, A PLC, and Managing Attorney of the firm’s Orange County office. He can be reached at JMacDowell@fiorelaw.com.

This Legal Update is published as a service to the clients, business associates, and friends of Fiore Racobs & Powers, A PLC, and is meant for advertising purposes only. It is not intended to be a solicitation and does not constitute the practice of law. While every effort is made to ensure accuracy, the legal analysis is not intended to be exhaustive, and recipients should not act on information contained herein without seeking more specific professional legal advice. The firm is not responsible for any errors that may inadvertently occur during publication. Copyright 2018, Fiore Racobs & Powers, A PLC.

Going Rogue: The New Perils That Await Directors Who Negligently Take Matters Into Their Own Hands

By: Nathan P. Bettenhausen, Esq., Fiore Racobs & Powers, A PLC, Orange County Office

Historically, the business judgment rule “set[]up a presumption that directors’ decisions are made in good faith and are based upon sound and informed business judgment.” Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715. Under this rule, a director is not liable for mistaken corporate action that is made in good faith, in what the director believes to be in the best interest of the corporation, and where no conflict of interest exists. See Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263. However, the recent decision in Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268 serves as a warning that the rule may only shield directors who first demonstrate that they meet a standard of reasonable diligence. Such an approach will likely have unintended consequences, the principal ones being that the business judgment rule may be unavailable for negligent directors and it may now be entirely ineffective at the summary judgment stage.

**The Parth Case**:

In Parth, the Board of Directors for the Palm Springs Villas II Homeowners Association, Inc. (“Association”) derived its authority from the Association’s governing documents, which included the Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) and the Bylaws. Although the governing documents empowered the Board to enter into contracts and to borrow money, they expressly limited the Board’s ability to enter into contracts longer than one year in duration without the approval of a majority of the condominium owners. Notably, the CC&Rs also contained an exculpatory provision that protected Directors from personal liability so long as their corporate conduct was made in good faith and without willful or intentional misconduct.

After the condominium owners voted against the Board’s request to levy a special assessment to offset costs connected with needed roof repairs, Parth, as President of the Board, pressed forward on her own to hire a roofing company. A contractor referred her to a roofer, but Parth neglected to investigate whether the company was licensed, failed to obtain a bid from the roofer, and was confused as to which company was ultimately hired. Nonetheless, the Board ultimately approved the retention of the roofing company. However, the Association’s expert opined that the roofer’s invoices were atypical and inflated, and that the work performed was deficient and required significant repairs.

To further complicate matters, Parth unknowingly exceeded her authority by hiring a new management company without Board approval, signing a promissory note without the approval of the condominium owners, signing a contract with a security company without Board approval, and entering into a five-year contract with a landscape company without the approval of the condominium owners. In her defense, Parth claimed that she didn’t understand the authority she was granted under the governing documents, but sincerely believed in her authority and in her need to act.

When the Board refused to ratify the security company contract, the company sued for breach of contract and the Association cross-complained against Parth alleging breach of fiduciary duty and breach of the governing documents. In her summary judgment motion, Parth successfully argued that the breach of fiduciary duty claim was barred by the business judgment rule and the exculpatory provision in the CC&Rs. The trial court found that Parth was disinterested, and acted, upon information she possessed, in good faith and without willful or intentional misconduct. As for the existence of bad faith, the trial court found that there was a triable issue as to whether Parth violated the governing documents, but concluded that such a violation was insufficient to overcome the business judgment rule or the exculpatory provision.

On appeal, the Parth court reversed and held that there were material issues of fact as to whether Parth acted on an informed basis and with reasonable diligence, thereby precluding the protection of the business judgment rule on a summary judgment motion. In so doing, the Court of Appeal explained that “whether a director exercised reasonable diligence is one of the ‘factual prerequisites’ to application of the business judgment rule.” Id. at 280. By characterizing “reasonable diligence” as a prerequisite to the rule, the Parth court suggests that the business judgment rule will only apply if directors can first demonstrate that they did not engage in negligent conduct. This would effectively remove a host of protections for directors who are merely misinformed, misguided, and honestly mistaken. See Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 137. Similarly, it may now become virtually impossible to successfully invoke the rule at the summary judgment stage since any conduct suggestive of negligence would raise a material issue of fact.

While the business judgment rule previously protected directors from liability for corporate actions that were unknowingly outside the scope of their authority, this ruling suggests that such a violation of the governing documents will, at least on summary judgment, bar the protection of the rule. As for the availability of the rule at trial, the Parth court leaves that very much in doubt. Parth, supra, at 284. At the very least, directors will now need to demonstrate that they attempted to ascertain the scope of their authority before conducting corporate business.

Best Practices for Directors:

To avoid personal liability and to come under the protection of the business judgment rule, prudent directors should follow best practices even during emergency situations. In situations when it’s impractical to follow corporate formalities strictly, a director should immediately thereafter apprise the board of recent developments and the basis for the director’s actions, and seek retroactive approval from the board for the actions taken.

In order to demonstrate that reasonable diligence was exercised, board meeting minutes should also carefully reflect the rationale behind corporate decisions and should document the decision-making process. Since directors will be required to affirmatively prove, in a lawsuit, that they employed reasonable diligence before taking corporate action, board meeting minutes are a valuable opportunity for them to create a written record. See, e.g., Corporations Code Section 314 (corporate minutes are prima facie evidence of the matters stated therein). And while the Parth court may have abrogated some of the protections afforded by the business judgment rule, it also reaffirmed the important role expert consultants and legal counsel play in the corporate decision-making process. See Corporations Code Section 309(b)(2) (directors are entitled to rely on the information, reports, and opinions provided by counsel and experts.) But as a cautionary tale, Parth should give pause to rogue directors: the business judgment rule isn’t what it used to be.

Nathan P. Bettenhausen is a Senior Associate Attorney at Fiore, Racobs & Powers, A PLC, where he practices business and real estate litigation, and provides representation to common interest developments. He can be reached at nbettenhausen@fiorelaw.com.

Orange County Lawyer, Volume 59, December 2016, Pg. 50

“The views expressed herein are those of the Author. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.”

Author: Fiore Racobs & Powers

By: Laurie C. Keating, Attorney at Law, Fiore Racobs & Powers, A PLC, Orange County Office

A Brief Overview

Case Summary

Takeaway

Case Summary

Takeaway

Case Summary

Takeaway

By: Nathan P. Bettenhausen, Esq., Fiore Racobs & Powers, A PLC, Orange County Office

The Municipal Landscape:

Options Available for Homeowners Associations:

By: John R. MacDowell, Esq., CCAL®, Fiore Racobs & Powers, A PLC, Orange County Office

What does this mean for your community association?

By: Nathan P. Bettenhausen, Esq., Fiore Racobs & Powers, A PLC, Orange County Office

The Parth Case:

Best Practices for Directors:

**The Parth Case**: