By Ann Rankin, Attorney at Law 

If the Board Does Not Protect and Preserve the Common Area, the Court May Appoint a Receiver to Do So in Place of the Board.

Occasionally, a homeowners' association is so dysfunctional that it cannot or will not perform its most basic duty of protecting and preserving Association assets. As a result, the buildings may suffer from severe water intrusion and/or other deferred maintenance; structural collapses can occur; the buildings' condition can become dangerous; sometimes the homes in the development become unmarketable.

Usually, the solution is to get some "new blood" on the Board of Directors.

But this does not always work. Sometimes, the Members simply refuse to approve the kinds of assessments that would be needed to take care of the problems, or the Board refuses to impose them under the emergency provisions in the Davis-Stirling Act. Sometimes, due to Member apathy or fear of liability, no one will even run for the Board.

Where normal political solutions fail, the results are usually drastic. Property values fall dramatically. In associations where many Members have no equity in their homes, people simply walk away from their units, leaving the lenders to foreclose and to try to dispose of the units at firesale prices. This, in turn, depresses everyone else's property values.

Courts are usually reluctant to get directly involved in the management of an association--even one with dire problems such as those described above. The judges lack the time and the expertise to take over the operation of such a dysfunctional association. However, there is one legal remedy that can be used to solve the problems of an association like those described above: appointment of a receiver to operate the Association and to try to solve the problems.

Initiating Appointment of a Receiver

Initiating appointment of a receiver must be done with the assistance of an attorney. Because of the nature of the remedy, individual owners will have to come up with their own money to pay the attorneys' fees. Most owners will not want to take this step unless the situation is a very serious one that is endangering their property values.

The legal fees will likely end up being several thousands of dollars. The attorney will first have to make an effort to resolve the problem without resort to legal action. Although a request for appointment of a receiver does not trigger the "alternative dispute resolution" ("ADR") requirements of Civil Code 1354, it may be best to request alternative dispute resolution, since, if the Board agrees, this could result in a less-expensive and less-divisive resolution.

If requests for ADR fail, or if ADR is tried but fails to solve the problem, the attorney will have to file a complaint against the Association, have it served on the Board members, and then file a motion for appointment of a receiver. The motion will consist of a notice of motion, of legal "points and authorities," and of factual declarations under penalty of perjury. The owners seeking appointment of a receiver will have the burden of proving that without a receivership, the common property will be destroyed or seriously damaged. Once the association's attorney receives the moving papers, he or she will have to file opposition papers. The Association's errors and omissions insurer will probably pay for the Association's defense. After the plaintiff's attorney receives the opposition papers, he or she will have to file a reply brief; the next step is the hearing before the Judge. If the Judge finds that the Plaintiffs have met their burden of proof, the Court will appoint the receiver, and will set forth the receiver's powers. Because this process is expensive, it should be used only as a last resort, and owners seeking a receivership will be well advised to work with their neighbors to form a group so the expenses can be spread. If the plaintiffs are successful, they will likely be awarded their attorneys' fees against the Association, since this lawsuit is one to enforce the governing documents; however, if they are unsuccessful, they may end up paying their own attorneys' fees as well as those of the Association.

As you can see from this discussion, a motion for a receivership is not something to be undertake lightly. It is not an appropriate remedy for owners who simply think they could run things better than the existing board. It is always best to try dialogue, communication and persuasion before attempting a receivership. However, if the owners really believe that the association's assets and the owners' property values are in jeopardy, and the board will not listen, then the owners can file their motion at that time; it is not necessary to wait until someone is injured or the building collapses before taking action!

When the Law Allows Appointment of a Receiver

Appointment of a receiver is authorized by California Code of Civil Procedure Section 564. The Superior Court may appoint a receiver where the plaintiffs demonstrate to the satisfaction of the Court that without such an appointment, there is a danger that the common property will be materially injured or destroyed.

Appointment of a receiver is considered to be a drastic remedy, and will not be ordered unless the plaintiffs are able to demonstrate to the Court that without the receiver, there is an immediate threat of injury, damage or destruction to property and to property values at the complex. In order to meet this burden of proof, the plaintiffs may file declarations under penalty of perjury, signed by property owners, contractors, engineers, real estate professionals, and others who have first-hand knowledge of the condition of the property. My office recently assisted a group of owners to have a receiver appointed. In that case, the Board had refused to abate termites; the roof had collapsed over one unit; there was serious structural damage and the Board had refused homeowner requests for a written plan to correct the problems. The largest real estate brokerage in Marin County refused to list properties in the development, having concluded they were unmarketable, even though the complex was in a very upscale area.

In this case, my office began asking the Board for a plan to solve the problems in September, 1997. We served the Board president with a Request for Resolution, but it was ignored. The group of owners who wanted action attended various board meetings and requested a plan to deal with the problems, and also provided the Board and the Manager with reports from contractors about the seriousness of the problems, but nothing worked. Finally, in about April, 1998, the dissident owners filed suit. The Association's insurer fought the receivership. The plaintiffs filed a motion, which the Association's attorney opposed. The judge's tentative ruling was to appoint the receiver, but the Association's attorney requested a hearing. Following the hearing, the Judge imposed the receivership, and ECHO attorney Wanden Treanor was appointed. The plaintiffs incurred over $8,000 in attorneys' fees, and are now seeking to recover them from the Association or its insurer. Ms. Treanor has engaged a structural engineering firm to develop a plan to take care of the problems.

How the Receivership Works.

If proof is made to the satisfaction of the Court, the judge will appoint a receiver to take control of association assets; to impose emergency special assessments if necessary; to obtain reports from qualified consultants concerning what repairs are needed; and to enter into contracts for the necessary work. The Association must pay all the resulting expenses, including the receiver's hourly fees. Such expense would have been unnecessary if the Board had acted responsibly, in accordance with its fiduciary duties. The receiver must make periodic reports to the supervising judge. The receiver will likely be an attorney, a bankruptcy trustee, an accountant, or a similar professional who has expertise in property management.

The Court will usually require the receiver to be bonded to guard against misappropriation of Association assets; of course, the cost of the bond will be passed along to the Association, one way or the other.

The receiver will likely stay in place until the problems that prompted his or her appointment have been solved; the court will require periodic reports. There is no set period of time for a receiver to stay in place.

In many cases, if there is an existing on-site manager or outside management company, that person or company will stay in place and will perform the day-to-day functions as usual. The receiver will take over functions that are normally performed by the Board, especially in the areas of solving whatever problems triggered the receivership in the first place. This may involve obtaining reports from design professionals regarding what remedial work is needed; obtaining bids from contractors; and entering into contracts. The receiver must operate the Association in accordance with the Davis-Stirling Act and other applicable laws. The cost of the receivership will be determined, in large part, on how much of the receiver's time is required to solve the problems; on how good or bad the Association's records are; and on how expensive it turns out to be to correct the problems. If there is a lot of deferred maintenance, defective construction, etc., the costs can be tens of thousands of dollars or even hundreds of thousands of dollars. The receivership will be terminated when the Court finds that the danger to the property and property values have ended.

Benefits of Receivership

Usually, by the time a receiver is appointed, lenders are reluctant to make loans within the complex, and the units, if marketable at all, can be sold only at a significant discount.

If the receiver does his or her job, however, property values may go back to normal, and the association may start to recover.

In an appropriate case, a receiver can perform an important service, although at significant cost to the Members.

Avoiding Receivership

ECHO members, through the organization, receive valuable education in how to perform their fiduciary duties, and have many opportunities to learn important information about how to care for and protect the association common areas and other assets. Since the ultimate alternative is receivership, association boards should be motivated to take their responsibilities seriously, in order to avoid the expense of a receivership, and the cost of a court action aimed at securing the appointment of a receiver. You must also remember that if Association members spend their own money on legal fees to secure the appointment of a receiver, they will likely argue that they were forced to file a legal action to ensure the enforcement of the governing documents--and that, as a result, they are also entitled to their legal fees under Civil Code 1354. So don't let a court order appointing a receiver happen to your association--with proper planning and business judgment, you can avoid all the trouble and expense. If your Association is dysfunctional, however, remember that in some cases, a receivership is the only practical way out, and may actually benefit the Association, although at a relatively high cost.

The material in this article is not a substitute for qualified legal advice about a particular issue. This article constitutes a summary only. If you have a legal issue involving these requirements, seek competent legal advice.

Law Offices of Ann Rankin, in Oakland, California, practices in the areas of common interest development law, real estate law and construction defects law.