BILL ANALYSIS �
SB 563
Page 1
Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 563 (Committee on Transportation and Housing) - As Amended:
May 23, 2011
As Proposed to Be Amended
SENATE VOTE : 37-1
SUBJECT : Common Interest Developments: Meetings
KEY ISSUES :
1)Should owners in a common interest development have advance
notice of board of director meetings, including closed
executive session meetings?
2)Should the board of directors be prohibited from making
decisions on "items of business" via e-mail or taking actions
outside of a noticed meeting, unless it IS an emergency?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill makes a number of changes to existing requirements for
noticing and conducting a board of directors meeting, and taking
actions outside of a noticed meeting, in a common interest
development (CID). Whereas existing law requires the board to
notify owners at least four days in advance of a regular, open
meeting of the board of directors, this bill requires the board
to notify members at least two days in advance of an executive
session of the board of directors, even though executive
sessions are not open meetings and not now covered by notice
provisions. In addition, subject to certain exceptions, the
bill would prohibit a board from conducting a meeting via a
series of e-mails or from taking actions on "items of business,"
as defined, outside of a noticed meeting. The bill would permit
"teleconference" meetings so long as homeowners are able to
participate in a central location. Finally, the bill defines
"item of business" to include any action within the authority of
the board, except actions that have been validly delegated. The
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author, the Senate Committee on Transportation and Housing, has
apparently received complaints about how CID meetings are
noticed and conducted. Opponents contend that this measure will
unnecessarily, and at great cost, require boards to notify all
members of meetings that they cannot attend and will deny boards
the flexibility that they need to communicate with each other
and take actions on routine matters between meetings. The bill
is supported by homeowner and consumer groups. This bill passed
off the Senate Floor on a 37-1 vote. It passed out of the
Assembly Committee on Housing and Transportation on a 6-0 vote.
SUMMARY : Requires the board of directors of a homeowners
association (HOA) in a common interest development (CID) to
provide homeowners with notice of executive session meetings,
prohibits meetings by e-mail, and prohibits board actions
outside of a meeting, except as specified, and makes other
related changes. Specifically, this bill :
1)Requires the board of directors of an HOA to provide owners
with a notice of any meeting that will be held solely in
executive session at least two days prior to the meeting.
Specifies that, if the member consents, notice may be given to
the member electronically.
2)Deletes a provision of existing law that allows the board of
directors to consider any proper matter at a meeting even if
the matter has not been identified in the notice as an action
item for the meeting.
3)Revises the definition of "meeting" to permit board meetings
by teleconference, as specified, so long as the notice for the
teleconference meeting identifies at least one physical
location where members may attend and fully participate in the
teleconference, and at least one member of the board is
present at that location.
4)Prohibits the board of directors from taking action on any
item of business, as defined, outside of a meeting.
5)Prohibits the board of directors from conducting a meeting via
a series of e-mails, unless necessary to conduct an emergency
meeting, as defined, if all members of the board, individually
and collectively, consent in writing to that action and if the
written consent or consents are filed with the minutes of the
meetings of the board. Specifies that written consent may be
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by electronic communication.
6)Defines "item of business" to mean any action within the
authority of the board, except those actions that the board
has validly delegated to any other person or persons, managing
agent, officer of the association, or committee of the board
comprising less than a majority of the directors.
EXISTING LAW :
1)Provides that any member of an HOA may attend a meeting of the
board of directors, except when the board adjourns to
executive session to consider matters of litigation, matters
relating to the formation of contracts, member discipline,
personnel matters, or meet with a member, upon the member's
request, regarding the member's payment of assessments.
(Civil Code Section 1363.05 (b).)
2)Any matter discussed in executive session shall be generally
noted in the minutes of the next meeting that is open to the
entire membership. (Civil Code Section 1363.05 (c).)
3)Provides that the minutes of any meeting of the board of
directors, other than an executive session meeting, shall be
available within 30 days of the meeting. (Civil Code Section
1363.05 (d).)
4)Provides that, unless the time and place of meetings are fixed
by bylaws, or unless the bylaws require a longer period of
notice, members shall be given notice of the time and place of
a regular board meeting, except for an emergency meeting, as
specified, at least four days prior to the meeting. (Civil
Code Section 1363.05 (f) and (g).)
5)Requires the board of directors of an HOA to permit any member
to speak at a meeting of the board, except when the board
meets in executive session. (Civil Code Section 1363.05 (h).)
6)Permits the board of directors of a corporation (including a
CID if incorporated) to take a required or permitted action
without a meeting, if all members of the board individually or
collectively consent in writing to that action. Specifies
that written consent or consents shall be filed with the
minutes of the proceedings of the board. (Corporations Code
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Section 7211.)
COMMENTS : The nearly 50,000 common interest developments (CIDs)
in California vary in size and structure, but are generally
multi-unit communities characterized by the following: (1)
separate ownership of individual residential units coupled with
an undivided interest in common property; (2) covenants,
conditions, and restrictions (CC&Rs) that limit the use of both
separate interests and common property; and (3) management of
common property and enforcement of restrictions by a homeowner's
association (HOA). With great regularity, this Committee hears
bills seeking to govern the relations (and conflicts) between
separate interest owners, on the one hand, and the HOA and its
board of directors, on the other. This bill falls into that
category.
A Board by Any Other Name? : Existing law, both under the
Davis-Stirling CID Act and the Corporations Code, generally
requires that a board of directors' meeting cannot be held
unless the owner-members are given adequate notice and have an
opportunity to attend the meeting and be heard. Although CIDs,
as corporations, are regulated by meeting provisions of
Corporations Code, as well as the Davis-Stirling Act, CIDs are
not typical business corporations. For example, while
shareholders of a business corporation have an obvious economic
interest in the actions of the board of directors, the separate
interest owners of a CID arguably have a much greater interest
in the actions of its board, given that those actions affect not
just economic interests, but the rules and regulations affecting
day-to-day life within the development. In this sense, CID
boards have duties more akin to local governments than corporate
boards. In recognition of this difference, in 1995 the
Legislature enacted the "Common Interest Development Open
Meeting Act" (Civil Code Section 1363.05), roughly analogous to
the Brown Open Meeting Act for government entities. Although
this Open Meeting Act did not remove CID boards from regulation
under the Corporations Code - indeed Davis-Stirling continues to
cross-reference the Corporations Code in several places - it
added more specific requirements better tailored to the
realities of a CID. This bill amends provisions of the CID Open
Meeting Act in order to provide, according to the author and
supporters, greater transparency and to address owner complaints
that some boards are taking actions and deliberating upon issues
that should be addressed in noticed meetings.
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Two-Day Notice for Executive Session "Meetings" : The CID Open
Meeting Act provides, as a general rule, that any separate
interest owner in a CID may attend a meeting of the HOA board of
directors and must be permitted to speak, "except when the board
adjourns to executive session" to consider a few expressly
enumerated matters: "litigation, matters relating to the
formation of contracts with third parties, member discipline,
personnel matters, or to meet with a member, upon the member's
request, regarding the member's payment of �delinquent]
assessments." These closed executive sessions are, technically,
not "meetings" at all and are therefore not subject to notice or
most other meeting requirements, except that any matters
discussed in executive session must be noted in the minutes of
the next open meeting. Unless the time and place of regular
meetings are fixed by bylaws, or in the case of any meeting
called between regularly scheduled meetings, the members must be
given notice at least four days prior to the meeting. Notice
must be conspicuously posted in a common area and mailed or
otherwise delivered to each unit. The only exception to the
notice requirement is when an "emergency" (defined as any
unforeseen circumstance that requires immediate attention) makes
it "impracticable" to provide notice. These notices do not
apply, however, when the board meets in executive session. This
bill would change that by requiring at least two-day notice
prior to any executive session meeting, unless of course it
rises to the level of an "emergency." Although opponents
contend that it is costly and unnecessary to send members
notices of meetings that they cannot attend, the author and
supporters note that members still have an interest in knowing
that the board is considering such matters, even if they do not
have the right to attend.
Prohibition on Meetings by E-Mail and Authorization of Meetings
by Teleconference : This bill prohibits board meetings conducted
by e-mail, unless it is used as a method of conducting an
emergency meeting. Arguably, this provision does not constitute
any substantive change in the law, given that existing law
requires all regular meetings to take place at a fixed location
and be open to all members to attend and be heard. If board
members are in fact conducting a meeting through an exchange of
e-mails, then they cannot possibly be fulfilling their
obligation to permit members to attend and be heard. In
addition, a "meeting" is defined under existing law as "a
congregation of a majority of the members of the board at the
same time and place to hear, discuss, or deliberate upon any
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item of business that is within the authority of the board."
(Civil Code Section 1363.05 (j).) Whether members exchanging a
series of e-mails have congregated "at the same time and place"
is perhaps best left to those who ponder the metaphysics of
cyberspace, but one could make at least a colorable objection
that such a "meeting" already violates the Davis-Stirling Act.
While this bill generally prohibits meetings by e-mail, it
nonetheless takes cognizance of new technologies and redefines
the definition of "meeting" to permit a regular meeting by
teleconference, so long as board members are connected by
electronic means in real time, to each other and to owners,
through audio or video or both. The bill specifies that a
teleconference meeting must comply with the usual notice
requirements and it must provide a central location where
members may fully participate. Opponents defend the use of
e-mail meetings by pointing out that board members may not
always be able to attend a meeting, especially on short notice.
However, permitting teleconference meetings appears to address
this concern while at the same time ensuring the right of
homeowners' to have notice and to fully participate.
Prohibition on Board Actions Outside of A Meeting : Perhaps the
most controversial provision of this bill is the one which
states that the "board of directors shall not take action on any
item of business outside of a meeting." An "item of business"
is then defined as "any action within the authority of the
board, except those actions that the board has validly delegated
to any other person or persons, managing agent, office of the
association, or committee of the board comprising less than a
majority of the board." Because an "item of business" is
defined as any action that "is within the authority of the
board," this would appear to mean that the board cannot take any
action as a board - since any action it legitimately takes must
be within its authority - outside of a meeting. This provision
is apparently designed to counter a board's authority under the
Corporations Code to take action outside of a meeting.
Specifically, Corporations Code Section 7211 says that a board
of directors of a corporation (including an incorporated CID)
may take a required or permitted action without a meeting if all
members of the board consent to the action. Presumably, these
later-enacted and more specific provisions of the CID Open
Meeting Act would trump the provisions in the Corporations Code.
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Opponents contend that the prohibition on taking "action"
outside of a meeting will require board members to call and
notice a meeting before they can perform even routine
operational matters. However, this seems an overly expansive
reading of this provision. To begin with, the bill does not
prohibit a board member from taking action; it prohibits the
board from taking any action that is within its authority as a
board. An attorney who represents community associations
informs the Committee that what is "within the authority of the
board" - that is, what the board is required and permitted to do
as a board - is generally set forth in the articles of
incorporation or governing documents. An "item of business"
that is important enough to require or permit board action as a
board is generally important enough to require a meeting.
"Routine" matters that may require action between meetings are
generally delegated by the board to an officer or employee of
the association, a managing agent, a particular board member, or
a subcommittee of the board. This is precisely why this bill's
definition of an "item of business" for meeting purposes
expressly exempts matters that have been so delegated.
Opponents have identified a number of situations in which board
members may need to take action between meetings, but which do
not and should not require a noticed meeting. However, many of
the situations cited by opponents appear to be overstated. For
example, consider the following two most frequently raised
objections:
- Insurance policies : Opponents contend that insurance
policies, especially earthquake insurance, must be renewed
upon with as little as 15-day notice, and there may not be
a regularly scheduled meeting within that time. However,
there are several reasons why this would not be a problem
under this bill: first, unless the insurance rates change
drastically, insurance costs are usually included within a
budget that has already been approved; second, even if not
in the budget, the HOA could delegate (and most likely will
have delegated) responsibility for making payments to an
officer, managing agent, or a subcommittee; third, even if
the item had not been budgeted or delegated, the board can
call a meeting with four-day notice if the renewal must be
done in 15 days; finally, if the item had not been budgeted
or delegated and the insurance needed to be renewed in less
than four days, then it would arguably fall within the
broad definition of "emergency" that includes any
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unforeseen circumstance that would make providing notice
impracticable.
- Unexpected Maintenance Issues : Opponents cite another
example: A gate will not open and owners cannot enter or
exit the development, and, presumably, the manager,
officer, or employee to whom such maintenance tasks have
delegated is not available to contact and pay a locksmith.
Even if a board member or other person had not been
previously delegated to handle such a situation, this set
of circumstances would arguably fall within the "emergency"
exemption. In addition, an individual board member could
presumably take this action, as it would not be an action
of the board. Finally, it is difficult to imagine that
anyone would object if the board or a board member took the
initiative to call a locksmith under these circumstances.
And if an especially disputatious owner were to object
after the fact, it is not clear that any significant
consequences would follow.
Opponents envision other scenarios in their letters of
opposition, including board decisions on short sales, payments
plans, authorizing payment to a vendor, responding to member
requests for documents, or setting times for a recall. Yet even
if these matters were not already delegated to an officer,
employee, committee, or managing agent, it seems unlikely that
any of these scenarios are so time sensitive that a four-day
notice will not suffice. Indeed, the California Association of
Community Managers (CACM) notes in its opposition letter that a
board must respond to a recall petition within 20 days, and that
"this usually falls between the association's meeting cycles if
they meet monthly or quarterly." This may be true. But the
board may call a meeting at any time with only a four-day
notice, so it is difficult to see how this bill would prevent a
board from responding in a timely fashion to a recall petition.
The Committee may wish to explore with the author whether this
bill could potentially encourage more delegation . While the
claims of the opponents seem somewhat exaggerated, the Committee
may wish to consider whether an unintended consequence of this
bill would be to cause a board to delegate more matters to
officers, managing agents, individual board members, or
subcommittees of the board. On the one hand, encouraging
delegation may be a good thing if it clearly delineates who is
responsible when unusual, but not entirely unforeseeable,
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situations arise. On the other hand, this Committee has heard
bills in the past - most recently AB 771 this session - premised
on the assumption that boards are already too eager to delegate
matters to third parties, including managing agents, who are not
clearly subject to the same constraints that Davis-Stirling
imposes on an HOA or its board of directors. In short, some of
the same groups that support this bill have, in the past,
contended that HOAs are too prone to delegate responsibilities
to third parties in order to evade requirements in the
Davis-Stirling Act.
In response to this criticism, however, the author has informed
the Committee that boards must delegate duties in an open
meeting and that such delegations can always be undone at a
subsequent open meeting if the person to whom a duty is
delegated acts contrary to the interest of the homeowners or the
community. Moreover, the author contends, allowing board
members to meet in secret or take actions outside of a noticed
open meeting - the kinds of things this bill seeks to prevent -
gives homeowners no input whatsoever.
ARGUMENTS IN SUPPORT : According to the author, the Senate
Committee on Transportation and Housing has heard a number of
complaints about HOA board of directors holding meetings without
providing any notice, conducting meetings by e-mail, and taking
actions outside of meetings. The author writes that "in order
to ensure open meetings and the ability for members to
participate, SB 563 clarifies that an incorporated CID may not
conduct meetings via email or written consent except in
emergency situations (as defined in current law)." The author
notes that this bill also usefully requires a two-day notice for
executive session meetings and clarifies that "a CID board
member may participate in a meeting by telephone or video
conference if at least one board member is present at a physical
location where members may participate and if the connection
allows all participants in the meeting to hear and be heard."
The California Alliance for Consumer Protection (CACP) supports
SB 563 as "a very strong and positive pro consumer (owner)
measure that not only recognizes" flaws in existing law, "but
attempts to resolve what we believe to be the largest one -
communications with boards and stakeholders." CACP supports
opening the CID decision making process "as wide as possible, so
those who want to become informed and participate, can."
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The California Alliance for Retired Americans (CARA) supports
this bill for substantially similar reasons as those noted
above, but it adds that "holding meetings by e-mail is not a
trivial matter, since board meetings are the proper venue for
awarding contracts, to take out loans, to set special
assessments. Homeowners have a statutory right to participate
in and to observe these deliberations. Conducting meetings by
e-mail shrouds this process in secrecy."
The Executive Council of Homeowners (ECHO), which represents
about 1500 community associations in the state, writes that "SB
563 addresses meetings of the boards of directors of common
interest developments. It will require at least 2 days notice
be given to members of an association prior to the board of
directors of that association meeting solely in executive
session. It also provides for the notice to be given
electronically and clarifies additional provisions relative to
meetings of boards of directors."
ARGUMENTS IN OPPOSITION : The Community Associations Institute
(CAI), which represents homeowner associations, opposes this
bill because "it simply would incite numerous, potentially
actionable matters that effect tens of thousands of
associations." To begin with, CAI contends that the author has
not provided any evidence that there is a widespread problem
needing to be addressed. CAI contends that the provisions
requiring the notice of closed executive session meetings will
serve no purpose since members cannot attend those meetings
anyway. Sending notices to all members, CAI believes, will be
costly and only create confusion and resentment among members
who receive notice of a meeting and then discover that they
cannot attend. CAI also claims that "routine matters, even
those previously authorized, still need to be conducted and
managed by the directors and/or staff which may not have
additional direction or authority." As an example, CAI points
to the aforementioned earthquake insurance policies, arguing
that "the board should be able to act on this matter before the
next general meeting which may not be scheduled for months."
CAI also contends that this bill would prevent "quick action on
the community gate that won't open." CAI contends that such
problems are not unforeseeable and therefore would not qualify
under the "emergency" exemption. Finally, CAI contends that the
definitions provided by this bill are inadequate and will create
uncertainty because there are seemingly no parameters as to what
is "within the authority of the board." In sum, CAI claims that
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this bill "cripples �a] board's ability to act on non-emergency
but essential items between meetings" and will add new noticing
costs with no corresponding benefit to homeowners, cause
frustration among members who receive notices for meetings that
they cannot attend, and ultimately "lead to litigation."
The California Association of Community Managers (CACM), whose
members act as managing agents for many associations, believes
that the provisions of this bill are "ill-conceived and
inappropriate." CACM, like CAI, argues that the author has
provided no examples of any harm or "excessive violations" that
would justify legislation. CACM points out that the board of
directors is elected by the membership to represent the members'
interest. This bill, CACM claims, will make it difficult for
boards to effectively act in the members' interest when issues
arise between meetings. CACM recites several actions that must
be taken between regularly scheduled meetings but which may not
have been previously delegated by the board and do not rise to
the level of an "emergency." CACM believes that existing law
appropriately permits boards to take actions without a meeting
"as long as ALL agree (written unanimous consent) with the
decision." CACM suggests that rather than prohibit these
actions that are permitted under the Corporations Code Section
7211, the bill should simply add a provision "that would require
the board to place any actions taken under this Code section on
the following open meeting or executive session agenda for
ratification and inclusion in the minutes for full
transparency." CACM believes that this bill will only produce
the unintended consequence that boards will delegate duties to a
third party or subcommittees or force CIDs to call "emergency"
meetings for non-emergency issues.
AUTHOR'S CLARIFYING AMENDMENT :
- On page 7, line 34, after "board" insert: Written
consent may be given by electronic transmission.
REGISTERED SUPPORT / OPPOSITION :
Support
California Alliance for Consumer Protection
California Alliance for Retired Americans
Californians Aware
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Executive Council of Homeowners
3 Individuals
Opposition
California Association of Community Managers
Community Associations Institute
Laguna Woods Village
Sun City Roseville Community Association
Waterford Retirement Condominium Association
Woodbridge Village Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334