New Requirement For Owner To Provide HOA With Specified Information

Effective January 1, 2017, the new Civil Code § 4041, requires an owner of a separate interest in a HOA to provide written notice to the HOA on an annual basis, presumably to its management company, of the following information:

1.         The address or addresses to which notices from the HOA are to be delivered:

2.         An alternate or secondary address to which notices from the HOA are to be delivered;

3.         The name and address of an owner's legal representative, if any, including any person with power of attorney or other person who can be contacted in the event of the owner's extended absence from the separate interest; and

4.         Whether the separate interest is owner-occupied, is being rented, if the parcel is developed by vacant, or if the parcel is undeveloped land.

The HOA is now required to solicit this information in annual notices to each owner, and at least 30 days prior to making certain required disclosures, enter the data into its books and records.

If an owner fails to provide the information required that is listed above, the property address shall be deemed by the HOA to be the mailing address to which notices are to be delivered.

An option for the HOA is to include a written request for the information on a form request prior to sending out annual disclosures to owners.  If an owner does not provide the information, the HOA should use the mailing address of the owner as the address to which notices are to be delivered. 

The HOA can also include the requirement of Section 4041 for an owner to provide the specified information in its rules and regulations, and conceivably fine owners who do not comply within a reasonable time. 

The information can be solicited from new owners as they take title to the property.

This new law clarifies the method by which HOA's can clarify an owner's address for  serving notice to an owner, and makes the owner responsible for providing the correct information regarding where the HOA should send notices.

Court Limits Duty of Escrow Companies

            Potential causes of action against escrow companies include those for breach of a contract such as escrow instructions, or a tort such as negligence, breach of fiduciary duty, and fraud.  As a general matter, the escrow holder's obligations are limited to compliance with the parties' instructions.  But as with most legal issues, the devil is in the details, and the outcome depends upon the facts in a particular case.

            In the recent decision of Alereza v. Chicago Title Company, the appellate court found that Chicago Title, handling an escrow for the sale of a gas station business, owed no legal duty of care to Alereza under a negligence cause of action, because he was not a party to the escrow (i.e., he was not the seller or buyer of the gas station), and he was not mentioned as a third party beneficiary in the escrow instructions. 

            Because Alereza formed a limited liability company (LLC) to purchase the business, even though he personally provided the initial deposit and a $100,000 promissory note secured by his residence, he was not personally a party to the escrow.  He did not sign the escrow instructions as an individual. As a result, he personally had no contractual relationship with Chicago Title, and he could not recover for breach of contract.

            However, Alereza also claimed that Chicago Title breached its duty to him under a tort cause of action for negligence.  The three essential elements of negligence are (1) legal duty of care, (2) breach of the duty, and (3) damages resulting from the breach.  The threshold element is whether the defendant owed a duty to use care toward an interest of another that enjoys legal protection against unintentional invasion. 

            The test for determining the existence of a duty of care was articulated in the California Supreme Court case of Biakanja v. Irving, an action for negligence by the sole beneficiary of a will against a notary public who prepared a will that turned out to be ineffective for lack of proper attestation, and it is a matter of "policy" and involves the balancing of various factors, including:

            a.         The extent to which the escrow transaction was intended to affect the plaintiff;

            b.         The foreseeability of harm to the plaintiff by the escrow holder;

            c.          The degree of certainty that the plaintiff suffered injury;

            d.         The closeness of the connection between the defendant's conduct and the injury suffered;

            e.         The moral blame attached to the defendant's conduct; and

            f.          The policy of preventing future harm.

            There was no dispute that Chicago Title was negligent in listing the wrong name of the insured when securing a new certificate of insurance for the business, requiring Alereza to give a personal guarantee that he claimed caused him losses when the business lost money.  However, the appellate court found no duty was owed by Chicago Title to Alereza because:

            a.         Alereza was not a party to the escrow that involved only the transfer of membership interests to the LLC, not Alereza personally;

            b.         At the close of escrow, Alereza had no personally liability for any business losses, and his subsequent decision to provide a personal guarantee was not something Chicago Title could reasonably foresee;

            c.          Chicago Title's mistake, while negligent, was not potentially fatal, and it was the "cascade of errors" by several different individuals in not checking on the insurance coverage that created the problem for Alereza;

            d.         There was only a remote connection between the misidentification of the insured and Alereza's eventual financial losses when the business declined;

            e.         Chicago Title's negligence was not morally blameworthy because the escrow officer did not act fraudulently, illegally, or with any intent to cause anyone disadvantage; and

            f.          No new legal duty on Chicago Title was necessary to prevent future harm because escrow companies already owe a fiduciary duty to parties to an escrow to properly carry out escrow instructions, and they already have both duties and incentives to faithfully execute the escrow instructions.

            This case illustrates how even experienced professionals, such as escrow officers, can make mistakes, and it is incumbent upon all persons involved in an escrow to carefully examine all documents and check on all aspects of the transaction as standard due diligence.  In other words, if you rely upon others to protect your interests, you create the opportunity for others to act negligently, and possibly cause you a disadvantage and lost funds or opportunity in the transaction, that you may not be able to recover in a lawsuit.

            It also illustrates how the details of the facts, including whether the claimant gave notice of its involvement in the transaction sufficient to give the escrow holder information of the role of the claimant, may determine the outcome of the dispute. 

            A hard money lender is in a similar role in an escrow as was Alereza, and it is essential that a hard money lender make a conditional delivery of the funds into the escrow, in a written document, to put the escrow holder on notice of the lender's role and exposure to harm if the escrow holder is negligent. 

            Often, a consultation with an experienced real estate attorney can be a valuable step in preventing the unfortunate outcome experienced by Alereza, who claimed he paid and borrowed more than $400,000 to keep the gas station business from defaulting on its lease.   Adding insult to injury, because he lost the appeal, he also had to pay Chicago Title its costs on the appeal.

           

HOA LAW - Recent Decisions Support HOA Board of Directors

            HOA Board Meetings Are Legally Protected Activity

            In the recent decision of Nancy Ann Lee v. Silveira, the court of appeals ruled in favor of the 6 directors who were sued by 3 other directors on the board regarding the majority voting to approve the renewal of the HOA's management company contract, and approving a bid for construction of a roofing project.  The minority directors asserted a cause of action for declaratory relief and in effect, were attempting to have the court decide between the views of the two camps of directors on the board regarding the disputed HOA issues.

            The majority directors filed a motion under Code of Civil Procedure, section 425.16 (statute that provides for an "anti-SLAPP" motion against a Strategic Lawsuit Against Public Participation lawsuit) contending that the claim arose from an act in furtherance of a person's right of petition or free speech, which includes any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest, or any other conduct in furtherance of the exercise of the constitutional right of petition or free speech in connection with a public issue or an issue of public interest.  

            The Court recognized that duly noticed board meetings of a HOA meet the statutory definition of a "public forum" within the meaning of the anti-SLAPP statute because they serve a function similar to that of a governmental body.

            The Court also recognized that the acts of the director defendants concerned matters of "public Interest" as defined by the statute.

            The acts complained of also involved director defendants' decisionmaking on "public issues" (i.e., the roofing project and the management contract) that divided the board.  The plaintiff directors complained that the defendant directors engaged in wrongful conduct as a result of how they voted in board meetings on the "public issues" affecting the HOA members.

            Because the defendant directors made a prima facie showing that the plaintiff's complaint arose from protected activity under the anti-SLAPP statute, the plaintiff's were required to show that their declaratory relief claim concerned an actual controversy involving justiciable questions relating to the rights or obligations of a party.   The Court concluded that the plaintiffs could not show an actual controversy on their claim that the majority block allegedly failed to obtain the necessary bids in connection with the roofing project or to renew the management contract.

            This case not only illustrates the extent to which dissident minority directors can feel so strongly about their opinions of board decisions that they will file legal action against the other directors, but it also confirms that the courts will enforce the protections provided to defendant directors when they are sued regarding their good-faith votes on HOA business during board of director's meetings.

            Homeowners Cannot Encroach On HOA Common Area Without Permission

            In the recent decision of Nellie Gail Ranch Owners Association v. McMullin, the appellate court affirmed the trial court's judgment in favor of the Nellie Ranch HOA to:

            - quiet title in favor of the HOA to a portion of common area on which McMullin had built a retaining wall and other improvements without the written consent of the HOA as required by its CC&Rs and Architectural Review Committee Guidelines that required prior written approval before construction of significant alterations to any improvements on their property,     

            - require McMullin to remove the wall and improvements at his expense, and

            -  pay the HOA more than $190,000 in attorneys fees and costs.

            McMullin's claim of adverse possession was rejected, even though McMullin argued the common area had no value and no property taxes were assessed for it.  The court found that HOA common area's have value, and the taxes on the common areas was assessed to the individual property owners in the HOA consistent with the law concerning property taxes on common areas owned by HOAs (under Rev. & Taxation Code, section 2188.5), and because McMullin did not pay them for the disputed common area for a five-year period, he did not satisfy that essential element of the adverse possession claim. 

            Although McMullin requested an equitable easement because he preferred to pay monetary damages to the HOA and have his retaining wall remain, the court agreed that a mandatory injunction requiring McMullin to remove the encroachment in the form of the retaining wall and improvement was appropriate because McMullin did not act innocently by his failure to disclose the true nature of his building plans and he began construction knowing that he did not have the necessary approvals, and the balancing of the hardships greatly favored the HOA as McMullin's construction had denied the HOA the common area it previously owned free of any adverse claim from McMullin.

            This is a significant decision in favor of HOAs, and confirms that the courts will support HOAs in legal actions filed to uphold the CC&Rs and Architecture Rules, and will find civil liability against members who deceive the HOA and build on common area without written consent from the HOA.  Prudent members should be careful that they comply with the rules set forth in this decision, as it will likely be cited by HOAs in future litigation regarding these type of issues.