Homeowner association members face huge assessment for legal fees

Question: Our board of directors made a claim against our insurance company that was denied. Without surveying the owners and membership or asking for a vote, the board filed a lawsuit. Before the court’s judgment against us, the insurer made a significant offer to settle the claim and the board turned it down, again without advising the owners.

The board went to court and lost the case, and the judge ordered the association to pay the insurance company’s defense costs of several million dollars plus the California-mandated 10%-a-year interest.

After the court’s judgment, the board then hired a lawyer to negotiate with the insurance company, and the company offered and agreed to cut the judgment by about half. Our board is now asking the owners for a vote to accept the insurance company’s offer and a vote to borrow the amount required to pay the company what it asked for.

The board’s plan is to impose a special assessment of five figures per unit or offer a monthly payment plan per unit for 15 years. The board believes the assessment ballot measures will pass because until the case is settled and an actual dollar figure is established, it is nearly impossible to sell a unit.

Sellers here cannot lower the price enough to offset an unknown assessment amount, nor can they establish an escrow account to cover it until an actual figure is known. Are there any alternatives to the board’s plan?

Answer: Unfortunately, there appears to be little alternative to the board’s plan to settle.

Also unfortunate is the fact that the board was not obligated to ask titleholders whether they wanted to file a lawsuit, although the duty of loyalty would dictate such a courtesy. Actions taken in rejecting the settlement would have had to be within the bounds of the law and within the guidelines of the Davis-Stirling Act.

Fortunately, the board has offered owners the opportunity to pay off this obligation over time, helping some owners avoid the possibility of not being able to pay it off.

Associations borrow money for a variety of purposes, including the payment of judgments against them. Those judgments will always remain in force until paid as associations are unable to file for bankruptcy protection to discharge such debts. That your homeowners association board finally chose to include titleholders in the decision making is only because it was required to do so, not because the board thought it was desirable.

Obviously, given the severity of the situation, the association’s options are extremely limited. Accept and pay the proposed settlement or continue litigating at the risk of having the existing judgment upheld. Even with the limited alternatives, the board needs to perform due diligence in obtaining at least a second legal opinion on its options and the proposed settlement.

The association’s leadership needs to understand how the situation deteriorated to this extent. The board’s decisions have affected the association’s operations and owners’ financial well-being.

Send questions to Box 11843, Marina del Rey, CA 90295, or e-mail noexit@mindspring .com.