Getting receiver for homeowners association typically is bad idea

Question: What happens if no one runs for the board and we can’t get anyone to serve? Does the state take over? Who if anyone puts us in receivership? How do those actions affect all of us titleholders?

Answer: Although common interest developments are state-created entities in law, the state has no interest in taking over their operations. There is no state agency that would initiate a “takeover” of a privately owned common interest development with a homeowners association.

When there are no directors to serve on the board, there may be two alternatives. The first is a court-appointed receiver. The second, under Corporations Code Section 308, is an independent director. Both require a petition by association members to the Superior Court and an order appointing one or the other.

Titleholders may hold a misguided belief that employing a third-party receiver is the answer to their problems. When an owner or owners file a motion for an order appointing either a receiver or an independent director to take over association operations, it is often accomplished at great cost to each individual titleholder. Courts approve the fees to be paid in both cases and association members are responsible for paying them.

Receivers are typically not a good idea as they assume control of all association operations and bank accounts, running the association as the receiver sees fit, often without owner participation. The receiver has the authority to bypass any voting processes that might otherwise occur. There is no management company or board influence, no titleholder input and no refusing to pay any increased assessments no matter how many or how much.

The association must pay the receiver for those services and fees that are court approved. Such fees are in addition to the association’s assessed operating costs and can easily exceed thousands of dollars each month, depending on the size of the common interest development and the complexity of the problems to be solved.

A board’s breach of fiduciary duty might leave the door open for the receiver to sue any past or present board directors to recover damages the association might have sustained. The cost of the lawsuit is borne by the association’s titleholders.

If the operating fund has been exhausted and there is no reserve fund, if the reserve fund has been depleted or if the available cash flow is below what is needed for maintenance and operating functions, each titleholder can be assessed on short notice for those costs.

Generally, basic operating costs are increased to fund the receiver and his or her expenses, thus raising the cost of living in that development. Such actions may result in the devaluation of the property. The costs of receivership can be staggering and the stigma of having been in receivership may remain well after the receiver has fulfilled the court’s order.

The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.