Notification of Trustee’s Deeds of Sale

By Jeffrey A. Beaumont, Esq.

            On September 28, 2008, Governor Arnold Schwarzenegger signed Senate Bill 1511 (“SB1511”) into law, amending California Civil Code Section 2924b as of January 1, 2009.  A copy of Section 2924b is attached to this article.  SB1511 requires banks and financial institutions to provide homeowners associations with a copy of a trustee’s deed upon sale (“trustee’s deed”) within fifteen (15) business days of its recordation.  CAI, through the California Legislative Action Committee, supported SB1511.

            Homeowners associations frequently experience significant delays in receiving notification of a foreclosure, causing additional delays in the collection of much needed assessments and in gaining compliance by owners for violations of the governing documents (most markedly regarding maintenance violations).  In recent times, associations have been hard hit by the housing and financial market crisis with an increased number of owners becoming delinquent in the payment of assessments.  Knowing when an owner is foreclosed upon not only changes from whom an association seeks payment of assessments but also affects the legal remedies that may be utilized by an association against the foreclosed owner.

            In an effort to permit more rapid notification of foreclosures to homeowners associations, SB1511 requires banks to provide copies of trustee’s deeds upon sale to an association that has recorded a proper notice with the County Recorder’s Office.  California Civil Code Section 2924b requires that the notice include the following provisions: (1) the name and address of the residence owner; (2) the name of the mortgagee; (3) the date of recordation of the mortgage; (4) the book and page where the mortgage was recorded; and (5) the person to whom the trustee’s deed should be sent, among other items.   The various counties have different recordation requirements and costs for such a request. 

            At first glance, many industry professionals thought that SB1511 allowed the recording of a “blanket” notice, generally permitting a single request to be recorded listing all properties in the association.  This is true where: (1) permitted by the County Recorder; and (2) practical.  Regarding the practicality of “blanket” notices, small communities will find it much more efficient and affordable to meet the requirements of SB1511 while recording a “blanket” notice.  This especially the case since the name and mortgage information of each owner must be listed on the notice.  However, in larger communities meeting the requirements of SB1511 in a “blanket” notice will be extremely time consuming and expensive.  Therefore, in these communities I strongly recommend that separate notices be recorded against units in collections and/or believed to be in foreclosure.

            With foreclosures increasing exponentially every day, Boards should discuss recording a request for trustee’s deed for all residences in the association to ensure continuity of operation and collection of assessments.  By recording the request, it may assist the association in avoiding extreme assessment losses and in avoiding misinformation as to the owner of a given residence.  However, the size of the community will dictate the method and procedure for recording notices.

       Did you know that in certain situations, a conflict of interest between the insurance company and the homeowners’ association (HOA) may require the insurance company to provide independent counsel to the HOA? 

An HOA has a right to independent Cumis counsel where a conflict of interest exists with its insurance company. 

Cal. Civ. Code section 2860(a) states that if an insurance policy imposes a duty to defend upon a liability insurer and a conflict of interest arises, that insurer must provide independent counsel to represent the insured at the insurer’s expense, unless the insured signs a written waiver. This independent counsel is known as Cumis counsel based on the 1984 case codifying the requirement. (San Diego Fed. Credit Union v. Cumis Ins. Soc, 162 Cal. App. 3d 358 (Ct. App. 1984)). According to James 3 Corp. v. Truck Ins. Exchange, 91 Cal. App. 4th 1093 (Ct. App. 2001), Cumis counsel is required only if the conflict of interest is significant and actual, not merely theoretical or potential.

        In the usual situation, the insurance company and insured share a single, common interest of minimizing or avoiding liability, and dual representation by counsel is beneficial to both. However, various circumstances may create a conflict of interest requiring a liability insurer to provide independent Cumis counsel to the insured, including: 

1)         The insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim. (Civ. Code section 2860(b));

2)         The insurer insures several insureds who have conflicting claims against each other;

3)         The insurer has filed suit against the insured, whether or not the suit is related to the lawsuit the insurer is obligated to defend;

4)         The insurer pursues settlement in excess of policy limits without the insured’s consent and leaving the insured exposed to claims by third parties;

5)         Any other situation where an attorney representing the interests of both the insurer and insured finds that his/her representation of the one is rendered less effective by reason of his/her representation of the other. 

The liability insurer’s duty to defend by appointing independent counsel for the insured arises where the insured shows that the underlying claim may fall within the policy’s coverage provisions. However, where the coverage dispute has nothing to do with the issues being litigated in the underlying action or if the damages are only partially covered by the policy, then there is no conflict of interest requiring the insurer to provide independent counsel for the insured. (Civ. Code section 2860(b))).

The insurance company may limit selection of independent counsel by setting forth minimum qualifications. 

While the insured has a right to select the independent counsel to represent him or her, the insurance contract may contain a provision which sets forth the method of selecting that counsel, including certain minimum qualifications. Civ. Code section 2860(a), (c). The California Practice Guide on Insurance Litigation Chapter 7B-K notes:

The insurer may supply the insured with a list of “independent” counsel experienced in defense work. Unless the policy provides otherwise, the insured is not obligated to accept anyone on that list. But before looking elsewhere, the insured should carefully screen the names on the list. The “plus” is that the insurer is likely to include names of truly experienced defense counsel and there will be no dispute about fair rates. The “minus” is that some defense counsel are so closely aligned with that insurer that it may be difficult for them to give their primary loyalties to the insured and ignore the insurer’s interests if a conflict should arise. 

The insurance company has a duty to pay independent counsel. 

       The insurance company is obligated to pay fees and costs incurred by independent counsel selected by the insured, limited by the usual fees the insurance company pays attorneys retained in the defense of similar actions in the community. Civ. Code section 2860(c).

The insured may waive his right to select independent counsel. 

       The insured has the option, but is not required to select independent counsel. Rather, the insured may elect to waive his right to select independent counsel, and instead authorize his insurer to select a defense attorney to represent him in the lawsuit. Civ. Code section 2860(e).

By Jeffrey A. Beaumont, Esq. and Jasmine M. Termain, Esq. of Rapkin, Gitlin & Beaumont

             There has been much discussion as of late regarding the Virginia Graeme Baker Pool and Spa Safety Act (”Act”).  Many questions have been raised as to its content and applicability to California and associations.  This article seeks to eliminate some of the confusion related to the Act, and answers the many questions we’ve seen regarding how the Act will impact associations.

            The Act is a federal law that takes effect December 20, 2008.  It requires owners of “public” pools (also refers to spas throughout the entire article) with submerged suction drains to retrofit the drains in order to limit and prevent drowning deaths caused by people becoming ensnared in a pool’s drain. 

              Significantly, the Act defines “public” to include multi-family residential dwelling common areas and their associations. Therefore, the Act applies to associations.

             The Act further applies to fully submerged pool drains. If an association has a surface skimming pool or spa drain, or a pool with certain types of multiple submerged drains, the pool or spa is likely in compliance with the Act. All associations with common area pools and spas are strongly encouraged to thoroughly investigate their drainage systems to evaluate whether they are in compliance. Federal enforcement of the Act falls under the United States Consumer Product Safety Commission (”CPSC”). 

             Many state agencies and pool vendors have expressed serious confusion as to whether or not the Act applies in California.  Some claim the Act does not apply because parts of the Act indicate it is “elective” or because it is a federal law and does not specifically state it will preempt state laws.  Associations should take careful note that the CPSC and California Department of Public Health have both published their official positions and have both unequivocally and uniformly stated that the Act does apply in California.  We confirmed this position in a phone call to Glenn Takeoka, REHS Chief of the Environmental Health Services Section.             

            The California Department of Public Health, Environmental Health Services Section is the state agency responsible for pool safety oversight throughout California.  As such, its official position that the Act applies should be treated as the correct and final interpretation that the Act applies to California.  Furthermore, the CPSC’s own interpretation memorandum (dated June 18, 2008), which responded to public comment on whether or not the Act applies to states, notes that the Act establishes a “minimum” safety standard.  In discussing the Act with a local pool safety expert, he indicated the current California requirements are not as strict as the Act and, therefore, all applicable pools within California will need to be properly retrofitted in order to be in compliance.  

            Having clearly established the Act applies within California, the next question becomes what should an association do next?  We strongly recommend that Boards retain a licensed and insured pool contractor to evaluate the need to repair drains and otherwise comply with the Act.  Should an association not be able to properly retrofit its pool drain, it is required to permanently disable the pool until the drain can become properly retrofitted.  The Act contains very specific technical specifications and requirements.  Accordingly, associations are strongly encouraged to contact their pool professional as soon as possible to allow enough time to adequately comply with the Act.           

            What happens if an association violates the Act?  The Act provides that both civil and criminal penalties can be imposed for violations (see, 15 U.S.C. 2070(a)). While an association in violation of the Act can be subject to penalties, the actual potential penalties for failing to comply are not yet firmly established. Currently, people who knowingly commit a violation of the Consumer Product Safety Act are faced with up to a $1.85 million penalty per violation (see, 15 U.S.C. 2069(a)(1)).  Clearly, the potential for civil and criminal penalties evidences the legislature’s strong commitment to seeing to it the Act is complied with.  Nevertheless, like complying with all laws, it is imperative that associations comply with the Act to avoid exposure to significant civil and criminal liability. 

            What can an association do if it does not have enough money in its budget for the repairs?  Many associations will find themselves having to pay for these unexpected, and unbudgeted costs to bring their pools and spas into conformance with the Act.  In this instance, an association without adequate reserves can consider levying an emergency special assessment in order to pay for the repair costs. Prior to passing an emergency special assessment, the Board must first obtain an estimate for the repair costs. Pursuant to Civil Code Section 1366, subsection (b), Boards may levy an emergency special assessment, without the members’ approval, if necessary to address a threat to personal safety or if necessary to pay an extraordinary expense that could not have reasonably been anticipated at the time the Board prepared and distributed the budget.  Boards are encouraged to review their CC&Rs and seek legal counsel to determine the viability and procedure for levying an emergency special assessment.  

This bill is codified in Title XIV, Section 1404, of the United States Code, and is commonly known as the Virginia Graeme Baker Pool and Spa Safety Act.  The text of the Act can be viewed online at: http://www.cpsc.gov/pssa.pdf.

Document and Notice Delivery to Members

By Jeffrey A. Beaumont, Esq. 

            A number of provisions of the Davis-Stirling Common Interest Development Act, governing the operation and management of homeowners associations in California, require the distribution of various documents and notices to the membership.  The precise manner in which those documents are distributed is of utmost importance.  Failure to comply with the manner of distribution of a given document has wide-ranging effects, from the invalidation of the document to monetary sanctions against the association.  The following is a checklist of the legal requirements for the distribution of key documents to the membership.

             Alternative Dispute Resolution – Civil Code Section 1369.530 requires that the association and members submit certain disputes to alternative dispute resolution, notice of which shall be served via personal delivery, first class mail, express mail, facsimile transmission, or other means that will provide actual notice.

             Amendment to the Governing Documents – Civil Code Section 1355 requires that they be distributed by first class mail postage prepaid or by personal delivery. 

            Association Records and Books – Civil Code Section 1365.2 requires that association records and financial statements be distributed to members, upon their request, via first class mail, only if the member requests delivery of the documents. 

            Ballots and Other Voting Materials – Civil Code Section 1363.03 requires ballots and other voting materials to be distributed to members via first class mail or personal delivery. 

            Board Meeting Notices and Agendas – Civil Code Section 1363.05 requires that notice and the agenda of Board meetings be posted in a prominent place in the common area of the association and sent by mail only to those members who have requested notification of Board meetings by mail.  The association may also distribute such notice and agenda of Board meetings by personal delivery and/or inclusion in the association newsletter. 

            Disciplinary Action – Civil Code Section 1363(h) requires that notice of a Board meeting at which the Board will decide whether to impose disciplinary action must be distributed to the member to be disciplined by first class mail or personal delivery.  The same method of delivery applies to notice of the Board’s decision to impose disciplinary action. 

            Fine Policy – Civil Code Section 1363 requires that fine policies be distributed by first class mail or by personal delivery. 

            Liens – Civil Code Section 1367.1 requires that a pre-lien letter be sent to a delinquent member via certified mail.  Further, a copy of a notice of assessment lien recorded against a member’s residence must be sent via certified mail to every person whose name appears as an owner of record. 

            Membership Meetings – Corporations Code Section 7511 requires notice of membership meetings to be distributed via personal delivery, electronic transmission (only if the member has previously agreed to such manner of transmission), or by mail to the last address appearing on the association’s books for that member. 

            Operating Rules – Civil Code Section 1357.130 requires that written notice of the rules, including the text, be distribute by at least one of the following methods: personal delivery, first class mail postage prepaid, electronic distribution (if the member has previously agreed to such manner of delivery), publication in a document that is circulated primarily to the association’s members (e.g. the association newsletter), television programming to the members, or with a billing statement. 

            Pro Forma Operating Budget – Civil Code Section 1365(d) requires that the pro forma operating budget be distributed to members, who request same, via first class mail. 

            Temporary Relocation of Owners – Civil Code Section 1364 requires associations to maintain common area, which occasionally requires the temporary vacation of owners from their separate interests.  Notice must be given to an owner that he/she must temporarily vacate his/her residence via (1) personal delivery to the occupants and first class mail to the owner of the residence or (2) first class mail to both the occupants and the owner of the residence, if different than the occupant. 

            Termination or Suspension of Memberships – Corporations Code Section 7341 requires notice to be given to a member regarding his/her membership termination or suspension via first class mail or registered mail. 

In other words: 

            It should be noted that “personal delivery” is defined by the California Code of Civil Procedure as being the actual physical service of a given document to the person to be served.  See, e.g., Code of Civil Procedure Section 415.10.   Accordingly, dropping notices off at an owner’s doorstep or in an owner’s mailbox is arguably a violation of the “personal delivery” requirements for the documents requiring personal delivery.  Delivery by dropping at doorsteps or mailboxes does not constitute the required “actual physical service” of the document for purposes of personal delivery.  As such, associations must weigh the exposure to liability that may arise by dropping notices off at doorsteps or mailboxes (if “personal delivery” is required) against the cost to engage in a mailing or other method of delivery as authorized by the pertinent Code section. 

            The foregoing is a summary of some of the many distribution requirements for homeowners associations.  We hope that this article assists you in navigating through the complexities associated with delivering legal notices and documents.