By Mary Filson, Esq.
Many homeowner associations in California are corporations. A corporation is a fictitious entity that exists only because there are state laws that say corporations can exist in California. You can tell that a corporation exists by the trail of documentation it leaves in its wake.
The advantage of being a corporation is the protection of the members from certain kinds of liability. But the price of this limitation of liability is that the entity must comply with the documentation and filing requirements imposed by state law. If those requirements are not complied with, the entity's status as a corporation can be suspended and the consequences can be very serious.
What Does It Mean?
During the time a corporation is suspended it cannot exercise its corporate powers, rights, and privileges, and contracts entered into while the corporation is suspended are voidable. This means the corporation can't initiate action to enforce governing document provisions or to collect delinquent assessments, initiate a lawsuit to enforce a contract or for other claims, or defend a lawsuit filed against the association. While the suspension is being cured, the association may miss an important date like the expiration of a statute of limitations for the filing of a lawsuit. Important corporate privileges are suspended which may include immunity of the officers and directors from liability or the protection of the members from "joint and several" liability, which could allow someone with a claim against the community to collect a judgment against one or a few homeowners who happens to have easily reachable assets. Voidable contracts could include insurance policies entered into while the corporation is in a suspended status. The corporation could lose its name, because the Secretary of State only protects names of corporations that are in good standing. Monetary penalties may be imposed. If a corporation fails to pay taxes for more than five years, the corporation can be dissolved.
Clearly, from the association's point of view, it is important for a corporation to maintain its active status at all times. From the board's and manager's point of view, there is the added potential of liability for failure to make timely filings, including potential claims for damages. Imagine if an insurance policy were voided due to a suspension of corporate status and an association found itself without coverage in case of a fire.
Why Does It Happen?
The most common reasons we see for suspension of a homeowner association's status as a corporation are: (i) failure to file with the Secretary of State (SOS) the biannual (every two years) statement of names of officers and of agent for service of process required pursuant to Corporations Code section 8210, (ii) failure to file with the Secretary of State the biannual statement required by Civil Code section 1363.6 and (iii) failure to file corporation tax returns with the Franchise Tax Board (FTB) or pay amounts that are owed to the FTB.
How Does It Happen?
Corporations Code section 8210 says the SOS is supposed to send a compliance notice to the corporation in advance of the deadline for filing the biannual statement of officers; however, failure of the SOS to do so does not relieve the corporation of the obligation to make a timely filing. Sometimes the SOS may fail to send the compliance notice, but typically there has been a change in manager and/or a change in agent for service of process and the notice from the SOS simply goes astray. The SOS is not required to send a reminder notice concerning the Civil Code section 1363.6 statement (but it is due at the same time as the 8210 statement - every two years within 90 days after the anniversary of the filing of the original articles of incorporation) and the FTB is not required to send any notice of failure to file (although sometimes it does).
The SOS and the FTB send notices to the most recent address they have for the association. When notices are sent to addresses that are out of date and the notices are not forwarded to the new manager, the problems don't get cured and in time the SOS or the FTB or both will suspend the corporate status of the association.
The SOS and the FTB talk to each other. If a corporation is suspended by either the SOS or the FTB, the corporation will be shown as suspended in the records of both agencies.
How Can You Find Out If a Corporation is Suspended?
To find out the status of a corporation, you can check on the Secretary of State's website. Go to www.ss.ca.gov. Under the heading Business Programs click on "Business Entities." When the California Business Portal page comes up, look on the left hand side under Online Services and click on "California Business Search." When the page comes up, enter the name of the association in the "Corporations" box and click on search. Sometimes different associations have similar names so be sure to look at all the names that come up and make sure you are looking for the proper legal name of the corporation and the corporate number (it is stamped on the articles of incorporation).
What If the Corporation is shown as Suspended?
To find out the reason for a suspension, it may be necessary to contact both the SOS and the FTB. The SOS may require prepayment of a fee which must be mailed or hand delivered to an office of the SOS. Mail inquiries can take weeks or months due to the short staffing of state agencies that has resulted from the state's budget problems. Because we frequently make inquiries with the SOS, our firm maintains a prepaid account with the SOS so we can get this type of information by phone.
If the problem is failure to file the 8210 statement and there is a credit card available to pay the filing fee, this can be cured very quickly by filing the statement online at the SOS website www.ss.ca.gov. Under the heading Business Programs click on "Business Entities." When the California Business Portal page comes up, look on the left hand side under Online Services and click on "E-File" and follow the instructions.
Currently, it is not possible to file the Civil Code section 1363.6 statement electronically, so if that is the problem, the form must be mailed in or hand delivered to a SOS office.
To find out if a suspension is due to a FTB problem, you can call the FTB at 1-800-852-5711. FTB problems usually take longer to cure but expedited processing can be requested to "revive" the corporation's status and to obtain relief from a void or voidable contract, if the required payments, returns, or other documents have been submitted.
Small Things Can Have Big Consequences
The periodic filing requirements for a homeowners association that is a corporation can seem trivial and annoying and not as compelling as something more tangible like taking care of a leak in the roof. But don't fall into the trap of thinking it's "just a technicality". It is a technicality but one that can have huge consequences for the association, its board, its members, and the manager.
THE BERDING|WEIL RESERVE FUNDING SURVEY RESULTS FOR 2008
By Tyler P. Berding, Esq.
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