Violating our by-laws … and paying dearly for it:
In Blog Post #4, I noted my concern about an alarming series of board decisions that I felt were illogical, expensive, and flatly contrary to the best interests of the members of my HOA, Laguna Woods Village.
This post discusses one of them, a by-law violation that wound up costing a member more than $12,000.00. But the member didn’t violate the by-law; the Third Mutual board did … and is still violating it. A second by-law violation – which cost the mutual much more money and resulted in an unnecessary statutory change – will be dealt with in a future post.
What ties both violations together is that, in each case, the board’s lawyer was the moving force, providing what in my opinion was perfectly disreputable legal advice; advice that allowed for the continued violation not only of our by-laws, but our fiduciary obligation to our members as well.
* * *
When I first joined the board, I was handed a pile of legal documents to sort through (after all, I am a lawyer): California’s Davis-Stirling Common Interest Development Act (the legislation that governs how HOAs – like Laguna Woods’ Third Mutual – can operate); our “CC&Rs” (the Declaration of Covenants, Conditions, and Restrictions that sets limits on what members can and cannot do); our articles of incorporation; our operating rules; and – perhaps closer to home – our by-laws.
Nothing popped out immediately as demanding attention; but after a few months, I joined the 5-person Executive Committee, which sat as a court in “cases” instituted against members for violations of our rules, or – more often – to recover reimbursement for charges incurred by the mutual to repair damage that was the member’s responsibility. A recurring example was when a refrigerator water line cracked, causing major damage to the member’s or a neighbor’s manor. Other violations included smoking on our premises; making excess noise; construction work beyond allowable hours; exceeding permitted alterations.
Often, these violations were not committed by the member (who usually was not even on the premises) but by a contractor hired to gut and rehab an old unit even before the member moved in. I cannot tell you how many cases we would regularly hear that involved a member who was not even living in their manor while a complete rehab was occurring; yet was being prosecuted because their contractor had violated one or another of our rules.
Uniformly the member would come in, plead that they knew nothing about the violation, and urge us to go lightly on a penalty, which could be as high as $500.00. And the Committee would generally show mercy by imposing a much-reduced fine as a consequence.
Our by-laws are very clear on the relationship among members, contractors and the mutual. They provide that members are personally liable for rules violations or damage caused by their contractors. But they also provide that contractors are equally responsible for rules violations or damage. So logically we should have been enforcing our by-laws against these contractors who violated our rules . . . but we weren’t.
The absurd result was that it both (1) exposed our members to liability (for their contractors’ actions), and (2) insulated the contractors from liability. Even worse, our failure to enforce our by-laws had the unintended effect of encouraging unscrupulous contractors to cut corners, secure in the knowledge that even if their violations were discovered, there was little or nothing that their customer (our member) – or even the board – could do about it. So quickly getting these contractors to adhere to our rules and make them subject to our jurisdiction became my mission.
There was only one problem: We had no “jurisdiction” over these guys; we had no power to compel observance of our rules; no way to make them pay for their violations. The reason the Executive Committee can enforce the rules against a member is because the member agreed – in the membership contract they signed when joining Laguna Woods Village – to be subject to our rules and regulations, and that contract gave our Executive Committee the necessary jurisdiction. Got it? The Executive Committee can enforce a fine or penalty on a member because the member agreed in writing that they can. We all agreed – when we joined this HOA – to submit to this rather informal arbitration procedure; and non-judicial arbitration is a procedure that over the past few decades the courts have come to strongly favor. It’s just simple contract law.
But no contractor had ever signed any such agreement. How to resolve the problem? Simple: Encourage the member to require the contractor – as a condition for getting the construction job – to do what each member does: agree to be subject to our rules and regulations; the Executive Committee would then have the legal authority to fine or otherwise discipline the contractor. It’s just a contract matter between the member and their contractor. If the contractor refused to accept that condition, the member could still use him . . . but would be taking a real chance. If however the contractor did agree, he becomes subject to our rules … and our arbitration process; and if he then violated our rules – exposing the member to liability – he too would be subject to a fine or penalty to the same extent as the member would. And the decision of the Executive Committee would be enforceable in a court of law. All it would take would be a simple one-page agreement that the contractor would sign as a condition to getting the job. Simple, no?
Well – unbelievably – no! When I presented my Contractor Proposal (a 2018 version of that 6-page proposal is found at the foot of this post), the board’s lawyer Sandra Gottlieb claimed that it violated our CC&Rs. (But it didn’t!) And at the following board meeting, she claimed that the proposal violated the Davis-Stirling Act. (But once again, it didn’t!) At that second meeting, the board president (Rosemarie diLorenzo) and secretary (Burt Baum) objected strongly to the Contractor Proposal, claiming that only the members should be responsible for such a violation, so we should not exculpate the member. Making the member legally responsible – they insisted – would force the member to be more cautious in their hiring. “We want to hold the member liable!” they both strongly argued. Another objection: imposing that sort of “burden” on a contractor would make the contractor, as Rosemarie put it, “less likely to want to work in the village” … and “it is difficult enough to get good contractors to work here in the first place.”
Of course, both those arguments were specious and illogical. The fact that the contractor could be liable did not exculpate the member; it simply added another person who was liable: the miscreant himself. And the claim that it is difficult to get contractors to work in our village is ridiculous: Is the air quality poorer in Laguna Woods? Is there a rash of thieves stealing tools from contractors’ trucks? Do our members regularly “stiff” tradesmen? Do old people have B.O.? Do they think old age is catching? So neither of their arguments made any sense.
In real time, would a contractor have the trouble Rosemarie and Burt warned against in signing my proposed contract? Absolutely not: As a test, I presented that very undertaking to three contractors whom my wife and I thereafter hired … and after reading it, they each signed … on the spot.
However, in order to cover all bases – remember I’m a lawyer – I prepared a “white paper” that explained (to the board) how the concept would work; and how the current situation left our members at great risk. The Proposal included a hand-out to members at the Alterations Desk, urging them to protect themselves by requiring their contractors to sign the agreement (giving the Executive Committee jurisdiction); and it included the agreement itself.
I had submitted the Proposal (with the supporting documents) well in advance of our next closed board meeting, so I was surprised to see that the proposal had not been listed in the meeting agenda, nor were copies distributed – following usual order – days prior to the board meeting. I therefore had to retrieve my documents, have them copied and distributed to the directors while the meeting was in progress. Of course, since my packet of documents comprised 6 single-spaced pages, no one had a chance to read a bit of it. And with the hostility of our principal officers, and our lawyer claiming that the proposal was illegal, it should come as no surprise that the proposal was voted down 1-10. [Anyone thinking that failure to include my proposal on our agenda was just an unfortunate oversight probably also believes in the Easter Bunny. But I digress.]
Since neither of the lawyer’s two claims made sense to me, I emailed her, asking:
“Since you seemed so confident in your opinion – and I in mine – could I impose upon you to explain the reasoning on which you base your opinion? I am asking this solely as a lawyer who is trying to get his head around a position that I simply cannot understand. So please do not consider this client business; and do not charge for your answer. If you are unable to separate the two areas, you don’t have to respond at all. Happy New Year, Sandra, Jules”
Surprisingly, her response was to claim that she did not have the president’s authority to answer my question. What a truly bizarre comment! If in fact the proposal actually did violate our CC&Rs or Davis-Stirling, what trouble would it have been to point out the prohibition? In my more than 50 years practicing law, no lawyer I ever dealt with has ever said something as – to be perfectly blunt – dopey as that to me. All she had to do was say: “Jules, Davis-Stirling §__ prohibits that procedure.” For that, you need the board’s permission? Lawyers can no longer exchange ideas? Good grief, what – if anything – was going through her mind? (What was going through her mind, I believe, was that I had exposed her advice to the board as just so much frivolous nonsense.)
Since I cannot stomach illogic, I pressed our president to force Gottlieb to answer my question. After all, without the protection I sought, members were at the mercy of any contractor they hired. And if the proposal really did violate the law, shouldn’t we know how? Didn’t the lawyer have an obligation to explain to us why this protective measure could not be utilized? While it took a special meeting of board officers (!), they did ultimately authorize the lawyer to answer my simple question: just explain how my proposal conflicted with our CC&Rs and Davis-Stirling.
What followed can only be described as farcical. That and how it cost one of our members over $12,000.00 will be addressed in my next blog post.
Here is (1) a slightly revised copy of the Contractor Proposal, altered when I believed I had finally gotten a majority of the board to agree. Also (2) a brief statutory analysis. The original version of the Proposal was distributed (albeit at the last moment) to all directors:
(1) Contractor Proposal (3 separate documents)
Note: I am not a California lawyer, and I never practiced HOA law back East, so – while I am confident in what I say below – it should be reviewed by competent California counsel. However, since Sandra [ ] stated that a prior, similar proposal violated the Davis-Stirling Act, she and her firm are totally conflicted, and cannot be the arbiter of this proposal. So if it is approved, we should consult separate counsel.
* * *
Enforcing Our Disciplinary Rules on Contractors
We currently are violating our own by-laws by not disciplining contractors that violate our rules and state construction codes. However, a simple procedure will not only bring us into compliance, but will fulfill our fiduciary obligation to protect our members’ interests. And we will look great for just doing our job.
Here are the relevant by-law provisions:
“2.2 POWERS. This Corporation has these powers:
“2.2.3 to adopt rules and regulations to carry out the purposes of this Corporation through its board of directors, including disciplinary procedures with regard to its Mutual Members, Qualifying Residents, Co-occupants, Tenants, and their Guests.”
That includes business guests … like contractors.
“4.5.2 Disciplinary Action by Board. The Board may take disciplinary action against any Mutual Member . . . for breach of . . . any Rules or regulations . . . [by] the Mutual Member or [their] Guest(s), any Co-occupant . . . or any Lessee . . . who may use the facilities . . . .
* * *
4.6 The term “Mutual Member” . . . shall include persons claiming or exercising rights under the Mutual Member, including Qualifying Resident, Co-occupant, Lessee or Guest or invitee of Mutual Member.”
So the by-laws that currently authorize us to discipline members also authorize us to discipline a Qualifying Resident, Co-occupant, Lessee or Guest or invitee of the Mutual Member. That seems to require us to do just that, which we aren’t presently doing.
All we have to do . . . is to enforce our by-laws as they were intended to be enforced; against anyone found to be violating our rules. What could be simpler? What could be fairer?
The only obstacle is that we presently have no jurisdiction – legal authority to exercise power – over a contractor whose relationship is solely with the member. So if we wanted to discipline a contractor, he would be within his rights to tell us to take a hike.
While our by-laws authorize us to fine and discipline business invitees, we can only do that in the traditional way: through consent. We can discipline a member because the member – when joining the association – consented to our disciplinary powers.
And that is precisely how we can obtain jurisdiction over a contractor: through a consent to be subject to our disciplinary rules. That’s all it would take. And we wouldn’t even have to get involved. If the member wanted protection, they could just demand – as a condition to getting that $50,000 job – that the contractor agree to comply with our rules . . . or be liable for their violation. What could be simpler?
All we would have to do is to encourage our members to require that their contractors consent to be subject to our disciplinary rules. A simple one or two paragraph agreement would do the trick. Then if the member went ahead with a contractor who refused to consent, they would have no one to blame but themselves in the event that the contractor committed a violation. And we would have done everything in our power to protect the member; we would have fulfilled our fiduciary duty.
Staff will have already investigated and determined that a contractor committed a violation and will have cited the member for the violation. [That’s the only way this issue could come up.] However, if the member has obtained the agreement I propose, the member will show it to Staff; and Staff will then simply send the contractor a copy of the citation and notice of the hearing. It’s that simple. The sole change from current practice is that Staff will send a copy of the citation and notice to the alleged culprit.
This procedure has several substantial benefits:
First, it enables our members to protect themselves (when they are helpless right now). And the members – to whom we owe a fiduciary obligation – would thank us for looking out for their interests. (They would know this when they received a hand-out at the Alterations window, urging them to protect themselves . . . by contract.)
Second, it enables us to discipline the real culprit, whether or not he ever pays a red cent. This avoids the situation where the executive committee substantially reduces a fine, because we felt sorry for the innocent member. I know this to be true: We did that on many hearing panels that I sat on. We gave up money we should have asked our members to pay.
Third, and even more importantly, the simple act of someone agreeing to respect our rules almost guarantees that they will respect our rules. It’s simply human nature for folks to do what they say they will do. Especially when they concede in writing that they will be responsible for a violation. And in the final analysis, isn’t that what all these rules are for, anyway? We want everyone to voluntarily respect our rules. The alternative is the equivalent of a police state: an increase in violations; an increase in disciplinary hearings; and an increase in hostility (from an innocent but still liable member). So this procedure only has good things to say for itself.
The [name redacted] case is a perfect example: His contractor decided to avoid testing clearly suspicious floor tiles because he thought he could get away with it, saving thousands of dollars in testing and remediation costs he likely would have had to eat, himself. The guy might have thought twice if he knew he risked a substantial fine if caught.
My proposal for holding actual violators liable for rules violations is based on two simple principles: logic and fairness. It does not exculpate a member. The member is still liable to us; it just adds another party – the guilty party – to the process. All my proposal does is allow members to protect themselves by requiring that contractors agree to be responsible for their violations of our rules. And if a contractor refused to agree, that would tell the member a lot about who they were thinking of hiring!
In fact, pinning a large fine on a blameless member is guaranteed only to make the member damned angry. Especially if they discover that we are not enforcing our own by-laws, they will quickly put two and two together, and realize that they were prosecuted and fined by a board that at all times knew who the guilty party was; had an obligation to prosecute that guilty party; yet failed to do its duty. We will have violated our most basic obligation: looking out for the benefit of our members.
But as important is how this will all play out with the community as a whole. We should want to develop a bond with our members, a sense of belonging; that we’re all in this together. We want our members to feel that they are a part of something bigger than themselves; that they are part of a special community; and their board is looking out for their best interests. It’s why we all ran for the board in the first place. God knows, it wasn’t for any monetary gain; and we sure have other things we can do with our time. I know I sure can.
Why a Member Would Never Sue a Contractor
At present, a member who was hit with a large damage award has only one remedy: suing the contractor. But that is a fool’s errand. Even if the damages were $15,000.00, it is almost certain that filing a lawsuit would cost at least that much: filing fees, the cost of deposition transcripts (>$3.00/pg), obtaining an expert report and then paying even more for the expert’s court appearance, legal fees, all this would cost a lot more than the case was worth. And the member would have to prove every single fact in court, a time-consuming exercise.
But if the contractor had agreed to be subject to our disciplinary process, and the Executive Committee had found the contractor liable for the violation or the damage, the member could file suit against the contractor based upon that decision. That sort of lawsuit would be prosecuted on an expedited basis and would be pretty much an open and shut case: The only issues would be (1) did the contractor agree to be subject to our disciplinary process, and (2) was the contractor provided all the rights set forth in the contract.
Procedurally, the member would file a complaint (based on the decision) and immediately move for summary judgment. That’s all it would take. I am not a California lawyer, but it is inconceivable that California courts would not recognize such a basic legal procedure, a simple application of logic. And the law follows logic. [Correction: The procedure is actually simpler than that: You just file a petition to confirm the award; the contractor would then have to allege – and prove – that the award was somehow infirm, a pretty tough road, given the strong public policy favoring arbitration.]
Sorry for the length of this tome, but I wanted to give you an accurate picture of how simple it would be to start enforcing our existing by-laws . . . and why adopting this proposal is so much fairer than sticking it to members who now have no way of protecting themselves. Our job is to protect the members, at least to the extent that we can.
Don’t you agree?
Notice Proposed to be handed out to members at the Alterations Department:
(To be Given to Members When Seeking Permits) Protect Yourself When Hiring Contractors:
Members are reminded that they are personally responsible for the conduct of all individuals they invite into the Village. Specifically, members can be – and are – disciplined and fined for violations and damage caused by their lessees, contractors and guests. In the past, the Board has disciplined and fined members when their contractors or lessees violate rules concerning smoking, working hours, noise, nuisance and the like; also when they cause damage.
We therefore urge members – when hiring contractors – to require that the contractors agree to (1) comply with our rules and regulations, (2) be responsible for their violation. as well as any damage they cause, and (3) participate in any Executive Committee hearing convened to enforce these provisions.
While members at all times remain liable for the conduct of whomever they invite onto our premises, signing this contract will both encourage the contractor to actually respect our rules; and allow the Board to directly discipline the person who actually commits the infraction.
The only way in which the Board can discipline a contractor (for example) is when the contractor agrees in writing to be subject to our disciplinary rules. Therefore you should insist upon obtaining this agreement before signing any contract.
Third Laguna Hills Mutual
Proposed Arbitration Agreement between Member and Contractor:
Contractor Rules Agreement
Subject Manor Address:
Third Laguna Hills Mutual (“TLHM”) has enacted rules and regulations that govern conduct within Laguna Woods Village, including but not limited to working hours, noise, clutter, smoking, parking, dumping, storage, etc. These rules apply to all persons entering or working in these premises, and are applicable to all members.
In consideration for the right to conduct business with the listed Member/Occupant, and in the conduct of such business, I agree that I and all persons working under my control and/or with my authority will respect the rules and regulations of Laguna Woods Village, as well as all state and local construction and other codes.
I understand that violation of this commitment might expose the Member/Occupant to a disciplinary fine and/or damage award by the TLHM Executive Committee; and I therefore agree that in the event that I or anyone working under my control and/or with my authority is found guilty of any such violation, or shall otherwise cause any damage, I shall be liable to the member for any fine or damage caused by me or such designee.
It is specifically understood that no liability of any kind shall be imposed upon me pursuant to this agreement unless (a) I am provided with the same violation notice as the member; (b) I shall have the right to appear (with the member) at the Executive Committee hearing; and (c) I can participate fully in the proceeding, to the same extent as the member. To be specific, all disciplinary procedures applicable to members in connection with any alleged violation shall similarly apply to me, including my right to notice and a hearing.
I designate the following name and address for service of notice of any such violation, and shall be responsible for notifying TLHM of any changes thereto:
[Fill in information]
This contract is made specifically for the benefit of TLHM, which is deemed a third party beneficiary.
Dated: Laguna Woods, California
(Name of Contractor):
[End of Contractor Proposal]
* * *
(2) Statutory analysis:
Statutory Basis for Disciplining Contractors
Since the CC&Rs were cited as preventing my proposal from being adopted – and since you are not lawyers – I have an obligation to make the point as clearly as possible.
But first I must tell you the principle that has guided everything I’ve ever done as a lawyer: The law follows logic. Without which we have Dickens’ classic eruption:
“If the law supposes that,” said Mr. Bumble, squeezing his hat emphatically in both hands, “the law is a ass — a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is, that his eye may be opened by experience — by experience.”
So you are in as good a position to understand the law as anyone. Either it makes sense or it is quickly discarded.
So here is how the law would analyze my proposal:
It is claimed that the CC&Rs control, so let’s see what they really say:
“1. The Mutual is hereby designated as the management body of the Project and all powers relating to the management, operation and maintenance of the Project and Common Area are vested in the Mutual acting through the Board.”
So all powers are exercised by [ ] the Board
“(Continuing) The Mutual shall have the right and power to do all things which may be necessary, convenient or desirable for the management, operation and maintenance of the Project.”
So we can do anything that is desirable for the management of the project
“(Continuing) Subject to the provisions of the Articles, the By-Laws and these Restrictions, the powers . . . include . . . those set forth in Section 1363 of the California Civil Code . . . .”
So we have the power to do whatever is desirable in managing the village … including powers identified in §1363
“California Civil Code §1363:
“(c) Unless the governing documents provide otherwise, and regardless of whether the association is incorporated or unincorporated, the association may exercise the powers granted to a nonprofit mutual benefit corporation, as enumerated in Section 7140 of the Corporations Code ….”
… and since our governing document don’t specifically prohibit us from disciplining third parties, we have all the powers listed in §7140
“California Corporations Code §7140: Extract:
“[A] corporation . . . shall have all of the powers of a natural person, including, without limitation, the power to * * * (b) Adopt, amend, and repeal bylaws … and . . . enter into contracts . . . .
* * *
What I am proposing is simply a procedure in which a member enters into a contract pursuant to which the Mutual is a 3rd party beneficiary. All we would be doing is enforc[ing] our rights under that sort of contract. The idea that our CC&Rs prohibit us from doing that is absurd. It’s nuts. No one can point to a single provision in our CC&Rs that prohibits us from following this agreed-upon procedure.
So anyone who tells you that the CC&Rs prohibit this proposal is selling you pure baloney.