Analysis of Daily Journal Article

July 18, 2004

By Peter Amherst
Copyright AHRC News Services

On July 9, 2004, the Daily Journal ( a legal newspaper in Los Angeles) published an article titled Bills May Curb Associations' Ability to Sue Homeowners - One couple's $74,000 legal bill over a parking place illustrates the problem, an advocacy group says by staff writer, Linda Rapattoni.

The article started with the case of Glenwood Springs Homeowners Association against Sanford and Mary Jane Madigan. Their alleged offense was that they had parked an F-150 truck that was 18 inches too long to fit into their garage. So they parked it either in front of their home or in guest parking. The homeowner association contended that this violated the CCRs of the association, and sued the Madigans.

The Madigans won and were awarded $60,000 in legal fees. This caused the association to levy a special assessment of $1000 per home to pay for the award. The homeowners were mad and voted out the board.

While the article by Linda Rapattoni is in general excellent, it contained claims by a Marjorie Murray a lobbyist for the Congress of California Seniors that AB 2718, currently making its way through the legislature, "could have prevented the Madigans' fiasco". She further states that AB 2718 "would require boards to notify all homeowners any time its members are thinking of spending reserve accounts intended for capital improvements on litigation." The first statement vastly overstates what the bill can do. The second statement is wrong.

First, AB 2718 only requires the board to notify the homeowners that reserve funds are being spent on litigation "in the next available mailing to all members pursuant to Section 5016 of the Corporations Code." AB 2718 does not require that this notice be mailed PRIOR to the filing of the lawsuit. If the association does not have a regular newsletter, Section 5016 gives the board 3 months to notify the homeowners. For the homeowners to meet and organize a recall of the board, that could consume another 3 months. Hence, the lawsuit could have 6 months of legs and a lot of dollars underneath it before the homeowners could stop it. Even if they did stop it, there may be complications as the defendants could demand their legal fees and costs. Hence in this regard, AB 2718 is much closer to being a toothless tiger than a panacea for homeowners.

Second, the statement that AB 2718 requires boards to notify homeowners anytime that they "are thinking of spending reserve accounts - - - on litigation" is simply wrong. Sec. 1365.5 (d) states:

"When the DECISION is made to use reserve funds or to temporarily transfer moneys from the reserve fund to pay for litigation, the association shall notify the members of the association of that DECISION in the next available mailing to all members pursuant to Section 5016 of the Corporations Code, and of the availability of an accounting of those expenses."

Hence, in the Madigan case, a lot of money could have flown out the barn door before the homeowners would have a chance to shut it again.

Ms. Rapattoni quotes Simon Freedman of Peters & Freedman, the attorney for the association, as saying that the association had a duty to enforce its rules.

Of course, a homeowner association lawyer would say that. He stands to make a lot of money from the homeowners for that noble stance. If the Madigans' legal fees were $80,000, it is safe to assume that the homeowners paid at least that for Mr. Freedman to prosecute the complaint. That is $140,000 out of homeowners' pockets over a vehicle that was parked on the street. That is quite a hefty parking ticket. At current prices, that $140,000 could have bought at least 5 F-150s instead. Mr. Freedman is a partner in the law of Peters and Freedman. This law firm has been criticised by many homeowners in Southern California for being excesively litigious.

There is another deficiency in the Laird bill, AB 2718, that may also contain elements of skullduggery.

Civil Code Section 1368 (b)states that "the association may charge a reasonable fee for this service based upon the association's actual cost to procure,, prepare and reproduce the requested items." The service referred is the provision of certain financial documents.

Across the state, homeowners have been up in arms over this "reasonable" provision. In reality, homeowners claim that HOA management companies charge exorbitant rates. Merit Property Management, for example, one of the largest management companies in Southern California, charges a minimum of $225 for a Resale Demand Statement. A HOA certification fee is $75. Before long, one is up over the $500 mark.

Homeowners assert that they are basically held hostage when they are selling their home. The only way to challenge the fees is to go to court, and this risks the sale of the home.

In essence, say homeowners, "reasonable" means "infinite". They point to the strangeness of the wording "a reasonable fee - - - based on the association's actual cost - - ." Homeowners argue that what is "actual" should be what is "reasonable", and vice versa.

In the early stages of the bill, this section characterized the charges imposed by Section 1563 of the Evidence Code as being reasonable. Under pressure from management companies, Assemblyman Laird quickly withdrew this provision and substitued the existing provision. The Evidence Code allowed 10c a page for copying, and $6 per 15 minutes for search time. Merit Property Management charges $75 an hour for a search - a 300% difference.

Laird's legislative assistant on the bill, Clyde MacDonald, at first assured homeowners that this would be addressed. But then he became adamant about it and refused to change it.

Homeowners then pointed out that there is something even more ominous about this provision. In 1997, Assemblymember Torlakson passed AB 1025. This is now codified as Civil Code Sec. 1366.2. It reads:

" (a) in order to facilitate the collection of regular assessments, special assessments, transfer fees and similar charges, the board of directors of any association is authorized to record a statement or amended statement identifying relevant information for the association."

Homeowners contend that this enables a board to create a lien against their property on behalf of management companies and others for "transfer fees and similar charges". Section 1368 (b) fees would come under this rubric.

Clyde MacDonald promised homeowners that he would get an opinion from the legislative council on this issue. Weeks dragged by and nothing happened. Finally, McDonald told homeowners that he had secured an opinion from an "expert" that such 1368 (b) fees could not become liens under 1366.2. When the homeowners asked who the expert was, McDonald said that it was Guy Puccio, a lawyer/lobbyist for management companies and others who supported the bill.

Homeowners demanded that MacDonald live up to his promise of getting an opinion from the legislative counsel. MacDonald said that he would. That was weeks ago. Homeowners have heard nothing back from MacDonald and the legislative session is winding down. Homeowners feel that they have been sandbagged by MacDonald.

Irrespective of these battles, what is now clear is that homeowner associations have become center stage in California public life. With almost 1 in every 4 Californians living in one, it is inevitable that the cultural, economic, social and political changes that these new entities produce, will play an increasingly important role in California thinking. It is encouraging that publications such as the Daily Journal are at last taking an active interest in this new form of housing. The purpose of this article is to correct some mistakes and point out some of the broader dimensions.