Q&A

Why homeowners can face financial harm if HOAs let their corporate status lapse

Question: Our homeowner association's corporation was suspended two years ago. I wrote the board and asked why this was allowed to happen but they never responded. Doesn't the board have to respond to my letter?

I am concerned about the legal ramifications of a suspended corporate status and wonder who is responsible for ensuring that the corporate records are kept current. Can the board blame the management company for not keeping the corporate status current? Is suspension of the association's corporate status evidence of a breach of the board's duty? 

Answer: The board has failed in one of its fundamental obligations, namely to maintain the corporate status of the association. As fiduciaries, there are some duties that are nondelegable, and maintaining the corporate status is one of those duties that the board cannot palm off to a management company. Assuming that the board did think the management company was taking care of maintaining the corporate records, the board still had a duty to supervise management’s actions and to verify that the records were kept current.

Titleholders also are entitled to know if the corporate status has changed and the board should respond to all correspondence it receives. One of the primary duties of the association’s board is to disclose and disseminate information. Failure to respond to member inquiries can result in litigation to compel communication. Certain requests from members also come with statutory deadlines for response. A failure to adhere to these timelines can result in monetary penalties, even if an inquiry is ultimately satisfied.

The board’s current obligation is to immediately remedy its corporate status. 

The corporate suspension may have happened for any number of reasons, including not paying due taxes or not filing its annual “Statement of Information,” a form that lists basic information such as the corporation’s address, directors and agent of service. The form is filed on the California Secretary of State website (www.sos.ca.gov), which has a search function that can provide the status of a corporation. The department can provide more detailed information on request.

If the suspension remains uncorrected, the corporation may not conduct any business using its corporate name. For example, if the association was a party to any lawsuits, it could no longer prosecute any claims it was making against others or defend itself against claims made against it. It would be unable to enforce its right to collect assessments or sue to collect them, though homeowners would still be obligated to pay them.

Lacking the proper corporate status also could jeopardize the association's insurance as well as individual titleholders’ insurance – and possibly individual mortgages with insurance requirements.

Ultimately, lacking the proper corporate status potentially puts the board at risk for a variety of liabilities and may make individual titleholders liable for debts or judgments imposed on the association. A corporate status insulates individual directors and owners from direct liability. If someone were to slip and fall and sue the association while the status was suspended, association members would be personally liable for any judgment, which would have to be divided among them.

Maintaining the association’s legal status is one of the first items on any board’s due diligence list and should be a recurring item on the meeting agenda checklist. There is no excuse for the board’s failure to keep the association’s corporate status current and its name in good standing.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com

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