Authorizing Action in the Face of Homeowner Association Apathy or
Paralysis: Judicial Rescue for Governing Document Amendments, Loans and Quorums
A key challenge facing any board is the problem of membership apathy or high voting approval requirements contained in the Association's governing documents (Articles, Bylaws, CC&Rs and Rules). The issue of member consent arises in the context of proposed governing document amendments, acquisition of loans, mergers or acquisitions; when selling property or seeking approval to construct or finance capital improvements. Perhaps the thorniest problem: getting enough ballots to achieve a quorum so as to have a valid election of directors.
To put the issue of member participation in context, this article addresses the effort it takes to develop and present governing document amendments to the members and the infrequently used but terrific judicial tool which permits a Court to authorize amendments and other “corporate” approvals even where the voting requirements of the governing documents cannot be met. Also addressed is how the judicial system can be used to authorize the election of directors and the holding of meetings even where quorum cannot be achieved.
The Amendment Process
The process usually begins when the board or manager recognizes that the governing documents are out of date or fail to adequately address basic operational problems. Documents become out of date mostly as a result of changes to the Corporations Code (for example, sections permitting electronic communications) or the Davis-Stirling Common Interest Development Act (“Act”). Problems that can be solved by amendments include disputes over maintenance or architectural requirements or the authority of the board or committees to name a few.
Once the decision to amend has been made, next steps include getting the participation of key directors, committee or association members to assist in the process, selecting counsel and reviewing legal input as to the many amendment options available. Experienced counsel will have templates based on years of experience and analysis but these forms will always require modification, sometimes a great deal, depending on the needs, interests and wishes of the board or committee.
Membership input can be key to a successful amendment project. “Q&A” letters, informational meetings and other forms of communication can elicit from the members issues that are very important, unimportant or, significantly, those which galvanize opposition threatening the entire process. Knowing what types of changes in the documents will or won’t aid in adoption of amendments can help the board and counsel frame the issues properly before submitting an amendment package to the members.
The amount of time the pre-voting process will take varies with each community and the issues it faces. The board should anticipate several months for the preparation and voting process. Some projects can be done faster, others will take longer; the difference is mostly in the type and amount of pre-voting input to the basic changes recommended by counsel that may occur on any given project.
Getting Out the Vote
Amending governing documents sometimes requires “supermajority” approval, that is, the approval of 60%, 2/3rds or 75% of the membership. This high bar can be difficult to achieve. Techniques to increase the chance of obtaining the required approval include providing the members with clear explanations for changes and statutory requirements, a forum for discussion, flexibility in the “final product” and extending the voting deadlines. Even so, these efforts are not always enough to assure passage of the amendment. In some of these cases, a court may be willing to step in and validate the amendments even without the approvals required by the documents.
The same considerations apply to resolutions submitted to the members for approval. For example, many governing documents prohibit, without the approval of 75% of the members, expensive capital improvements, loans, easements or the sale and purchase of property. In those cases, a great deal of preparation and communication is needed to garner that approval.
For annual or other membership meetings (including those involving elections), all that is needed to have owners return their ballots or attend the meeting; they may not even have to vote! Even so, the lack of participation can paralyze the Association and prevent it from properly operating.
In all these cases, when the approval levels required by the governing documents cannot be obtained, judicial relief may be available.
The Four Keys to Judicial Relief
Generally, courts are reluctant to intervene in the “governance” of a homeowners association. However, the legislature has carved out exceptions which permit judicial intervention to authorize complete or “spot” amendments to the CC&Rs (Civil Code §1356) or corporate action, including amendments to the Articles of Incorporation and Bylaws and other types of proposed resolutions (Corporations Code §7515). In effect, these laws permit a Court to lower the voting requirements necessary to implement amendments or loans, sales, easements or other types of corporate activities. This article focuses first on the rules relating to CC&R amendments under §1356. Procedures concerning corporate approvals and amendments to the Articles and Bylaws are discussed towards the end of this article.
Obtaining judicial relief is a four step process: a Petition must be filed which sets forth the governing document voting requirements and the steps taken and documents used to comply with those requirements; a hearing on the granting of the Petition must be set and written notice must be provided all members; the Association must persuade the Court that granting the Petition and approving the amendments is reasonable; and, if approved, the Order granting the Petition must be filed, recorded and, with the amendments, distributed to all members. Generally this process is very fast and should normally take 45 – 90 days. It will almost always be far less expensive than “litigation.”
Step 1: Getting in the Door
The Association’s Petition must describe the effort made to solicit membership approval of the amendment as required by the governing documents, the number of votes cast in favor and against the amendment and the number of affirmative votes required to approve it. The Association must also file copies of the governing documents, the amendment, the notice and voting solicitation materials and a short explanation of the reason for the amendment. Other information and documentation the Association believes relevant to the issues may also be filed. Typically, this will include legal argument as to why the Petition should be granted.
Step 2: Setting the Hearing
At the time of the filing of the Petition, the Association may apply for a hearing date. Unlike traditional lawsuits, the “trial” of the Petition will occur at a one day hearing in which the Court will hear arguments from counsel and anyone else (owners included) who wish to support or oppose the Petition. Notice of the hearing must be provided all owners and typically notice by first class mail is acceptable. The Notice usually will be accompanied by a copy of the Petition, the Order setting the hearing and a letter from counsel explaining the procedure and advising owners of their right to attend the hearing, write the Court and to obtain copies of all papers filed by the Association in support of the Petition. At least 15 days notice of the hearing must be given; typically the hearing is held within 45 – 90 days of the date the Notice is mailed to owners.
Step 3: Objections Before and at the Hearing
Opponents of the Petition may send written objections to the Court. These can be informal letters or formal briefs. Also, opponents (or their counsel) may attend the hearing and ask the Judge to permit oral argument. The Association’s attorney will likewise be in attendance to address the Judge’s concerns and to respond to objections. Depending on the issues, the hearing will usually take between 15 and 45 minutes.
Step 4: After the Hearing
If the Court grants the Petition, Association counsel will obtain a certified Court Order and cause it, related documents and the amendments filed with the County Recorder. Once filed the amendments become effective as if approved by the members. The amendments must thereafter be distributed to all members.
It is wise to base “campaign” strategies on the possibility that judicial relief may be needed once the voting period is over. Until recently, the voting period could, in many cases, be extended (sometimes many months) to solicit more “yes” votes. The new voting rules contained in Civil Code §1363.03 are more restrictive and thus judicial assistance will become a more appealing remedy for associations paralyzed by low voter turnouts. Even without advance planning, judicial relief is available. In both cases, a board should realize that the hard work it (and committee members) put forth to educate members and seek their vote does not have to be in vain.
Even if all the requirements for judicial relief are met, the Court is not required to grant the Petition. It will be denied if the amendments take away the rights of voting classes (unless the amendment is approved by at least half the class), eliminate special developer rights or impact the security interests of lenders. And, importantly, the Petition can be denied if the Court does not think the amendment is “reasonable.”
Whether an amendment is “reasonable” will depend on many factors but unfortunately, there are no cases that specifically define how the Court should determine reasonableness. The legislative history to Section 1356 suggests that judicial relief should be used to address “important” amendments or those which failed as a result of membership apathy but these requirements are not contained in the law itself. Other considerations might include whether the board extended the voting deadline to permit greater membership participation; if the amendment concerns the revision of maintenance responsibilities as a way of saving the Association money or to avoid future responsibility for claims; the extent to which the amendment might impact one group of owners at the expense of others; the manner in which the amendment might change existing expectations of the members; and other considerations.
Judicial Approval of Corporate Action
(Quorums, Amendments and other Voting Requirements)
Section 1356 of the Civil Code deals with the problem of amending what is basically a “deed restriction,” a document affecting the use of real property. By contrast, Corporations Code Section 7515 is much broader: it permits a Court to authorize corporate action if “for any reason it is impractical or unduly difficult” for that consent to be obtained by the board or members as provided in the Articles of Incorporation or the Bylaws. The procedural requirements of a hearing and membership notice are similar (but looser) than those mandated by the CC&R Petition procedure discussed above.
While a Section 7515 Petition can be used to obtain judicial approval of amendments to the Articles and Bylaws,2 it can also be a powerful tool to achieve political goals that, owing to apathy or other reasons, cannot otherwise be accomplished. Thus, a Court could reduce the ballots or voters needed to establish a quorum needed or to conduct elections or the number of membership approvals needed to authorize secured loans, the purchase or sale of property, easements, annexations, capital improvements and special assessments and even the IRS rollover.
Be Smart and Forward Thinking
Before embarking on a governing document amendment or any major project that requires membership support, the board and counsel should “look ahead” to situations in which judicial approval might be needed or could be used. Planning in advance how, when and what type of votes are submitted to the members can increase the chance that, “at the back end” the judicial Petition tools created by the legislature can be used to achieve goals that promote the best interests of the Association.