Archive for the ‘Governance’ Category

Berkeley Town House 2012–2016 litigation: documents

Friday, February 24th, 2017

I have made available here public records of two related lawsuits involving Berkeley Town House Cooperative Corporation (“BTH”). This litigation began in March 2012 and ended in October 2016.

The first suit was “Jonathan Pool vs. Berkeley Town House Cooperative Cooperation, Almalee Henderson, Judith Wehlau, Charles Tuggle, Katherine Miles, Nancy Epanchin, Raymond Dirodis, Rita Zwerdling, Cheryl L. Samson” (case RG12620088). It was filed on 6 March 2012 in Alameda County Superior Court, California.

The second suit was “Jonathan Pool vs. Almalee Henderson, Judith Wehlau, Charles Tuggle, Katherine Miles, Nancy Epanchin, Raymond Dirodis, Rita Zwerdling” (case RG15779830). It was filed on 29 July 2015 in Alameda County Superior Court, California.

To see the records, you can visit:

To search within either collection, you can enter a search term and click on “Search”.

Both cases were classified as “complex” and assigned to Department 17 of the court.

The public court records in these collections are available also from the Superior Court itself, too, at its website, but they are not topically indexed, not searchable for words and phrases, and (in most cases) not free unless you inspect them at the court.

There are also some other entries in this blog about BTH litigation.

Berkeley co-op planning to drain its swamp

Friday, January 13th, 2017

This content is password protected. To view it please enter your password below:

Lawyer to housing co-ops: You’re in a legal mess

Sunday, October 16th, 2016

California attorney Adrian Adams has published a commentary on the legal status of housing cooperatives, calling into question how they can exist under California law.

According to Adams, California’s Davis-Stirling Common Interest Development Act defines a “declaration” (a.k.a. “CC&Rs”) as one of the prerequisites to that act applying to a housing development, but he says a stock cooperative, unlike a condominium association, cannot possibly satisfy that prerequisite, because it cannot have a declaration. Instead, says Adams, it has a lease or occupancy agreement defining the terms under which the co-op members occupy their units.

A reader might infer from Adams’s analysis that the members of any housing development, whether a co-op or not, can exempt themselves from Davis-Stirling act simply by not recording a declaration.

Adams, in addition, says that co-ops have both advantages and disadvantages in comparison with condominium associations. Cooperatives have the power to evict their members, while condominium associations can only wish they had such power. On the other hand, he says, cooperatives constitute an inferior form of property ownership for the purpose of obtaining financing.

How well does Adams’s analysis hold up under scrutiny? Are housing co-ops in California a legal contradiction? Here are two facts that may be relevant:

  • Housing cooperatives can have declarations, and some do. For example, Berkeley Town House Cooperative Corporation is a stock cooperative with a declaration recorded on 15 March 1989 in Alameda County.
  • The Davis-Stirling Common Interest Development Act defines a declaration of a stock cooperative as any document, “however denominated”, that contains (1) a legal description of the property, (2) a statement that the common interest development is a stock cooperative, (3) the name of the association, and (4) “the restrictions on the use or enjoyment of any portion of the common interest development that are intended to be enforceable equitable servitudes”. It qualifies all this with the phrase “recorded on or after January 1, 1986”, and one might wonder whether that is a requirement on all declarations or only a limitation on which declarations must contain the above 4 kinds of information.

What conclusions can we draw? I don’t know. The newsletter comment by Adams leaves questions unanswered, but may usefully provoke co-ops to review their governing documents and consider a more expansive set of possibilities than they have done before.

Rule changes proposed at BTH

Saturday, February 20th, 2016

The Board of Directors of Berkeley Town House (BTH) met on 27 January and heard the President advocate some changes in the operating rules. I don’t recall any discussion or a vote by the Board on the changes. In any case, on 16 February a notice of proposed rule changes appeared on a bulletin board, and on 19 February BTH’s manager sent the notice to some BTH members. The notice invites members to submit comments by 21 March.

For the convenience of other members and for the many friends and prospective members of BTH who may wish to keep up with developments at this historic senior housing cooperative, I make available here a copy of the proposal.

[This entry was originally posted on 19 February and edited on 20 February in light of new information.]

Co-op volunteer liability: myths and realities

Sunday, April 12th, 2015

The issue

You’re a member of a housing cooperative, you agree to join its volunteer board, and something goes wrong. You get blamed. If you did, indeed, act improperly, must you pay? If the damage was extreme, could you even go personally bankrupt?

I have been hearing members of a Berkeley co-op talk about this question. Most of what I hear is speculative. No facts, just presumptions. What most seem to believe is that volunteer directors are completely shielded from liability. If they mess up, they say, somebody else will pay.

True or false?

The myths

If it’s obvious to you that directors of a housing co-op can cause major damage, you don’t need to read this section. Otherwise, here’s a realistic scenario.

Mary wanted to help build a caring community at Senior Tower. Polly, her mentor, suggested she offer to serve on the board of directors of the cooperative corporation that owned the property. Mary agreed, turned in her form, and got elected.

Then, one day, the board interviewed Henry, who was proposing to buy in. Henry seemed kindly enough, and the friends he had named had said complimentary, even if vague, things about him. After the interview, the chair told the other community members to leave the room so the board could make its decision in secret. Jim protested, saying this secrecy was against the law, but Mary and the other directors persisted, because Jim was a chronic complainer. Behind closed doors, they exchanged perfunctory words and voted to admit Henry. He moved in three weeks later.

That’s when trouble began. Henry made friends with almost everybody, but several friendships were unusually close. A few months later police detectives and FBI agents began contacting community members, asking whether they had given anybody power of attorney. Rumors started circulating, and then a scandal went public.

Henry, it turns out, had a long record. Before moving to California, he had left elderly victims in four states. They had trusted him to do as he wished in their bedrooms and bank accounts. The risks of letting Henry into Senior Tower would have become evident from a criminal background check or a credit check, or if the board had insisted on talking with his last few landlords or employers. But Mary and the other directors didn’t authorize any investigations. That would smack of privacy invasion. And why bother? Henry was a funny guy and an avid gardener. He told entertaining stories about his upbringing. “I can judge character”, Mary said.

Before he suddenly disappeared, leaving his lender holding the property, Henry had, yet again, done damage. Whatever down payment he had forfeited was dwarfed by the monetary “gifts” received from a few Senior Tower residents, who were now facing foreclosure. Medical consequences of his relationships, too, began to surface, potentially overshadowing even the economic losses.

Claims were made, and not only against in-absentia Henry. They were made also against the co-op, for recklessly letting a known predator in, and individually against each and every director, since they had all participated in this “grossly negligent” and “illegally secret” decision.

At first, Mary assumed that she had been named in the legal complaints only as a formality. Polly and others had assured her that she couldn’t possibly be liable personally for anything that she might do wrong while a director. After all, she was a volunteer, responding to an invitation from Peerless Community Management. It had defined the “fiduciary duty” of a director as nothing more than “the greater good”. That’s what Mary was striving for, so she assumed that she knew her obligations. Surely the insurance policy would cover everything. And, if it didn’t, the community itself would. Pay personally? Unthinkable.

The realities

Some limited protections for volunteer directors exist, but the limits are not precise and disputes can arise over them. Unless you learn some facts about your particular co-op, you can’t know whether you have any protection at all.

Here are seven realities that a co-op director, or potential director, would be prudent to consider. The cited code sections apply to California consumer cooperative corporations that own housing communities (common interest developments); other organization types have their own code sections, which may not be identical.

Reality 1. If you agree to join the board without examining the co-op’s and your own insurance coverage, you are not managing your risk. Smith-Chavez et al. (2011, p. 8-27) advise attorneys:

Before a client agrees to become a board of directors member, obtain a copy of insurance coverages for the association and review them to ensure that coverages are adequate and that the limits are sufficient. Request that the insurer notify the board of any insurance coverage changes or terminations.

Reality 2. Once a director, you put yourself at risk if you tolerate illegal conduct. Smith-Chavez et al. (2011, p. 8-27) advise further:

Moreover, caution a director client to submit a written resignation from the board if the board appears to be acting in bad faith or otherwise conducting association affairs improperly.

Reality 3. Your statutory protection from personal liability isn’t absolute. Civil Code Section 5800 protects you only after $500,000, so you might have to pay anything up to that amount not covered by insurance. In addition, you get no protection if any of these is true:

  • You acted outside your duties as a Director.
  • You didn’t act in good faith.
  • You acted willfully, wantonly, or with gross negligence.

Reality 4. Insurance policies can contain exclusions. For example, one insurer of director liability (Ironshore, 2007) excludes claims by the community against a director. Another insurer named all the so-called troublemakers in a community and excluded any claim by any of them from coverage. And, in a community whose directors had already been sued, one insurer excluded coverage for any act similar to the acts alleged in the previous suit.

Reality 5. When the insurer doesn’t pay, the community, too, may fail to pay, leaving you with the debt. Corporations Code Section 12377 prohibits the community from covering your obligation if any of these is true:

  • You didn’t act in good faith.
  • You didn’t act in a manner you reasonably believed to be in the best interests of the corporation.
  • If the case is criminal, you had reasonable cause to believe your conduct was unlawful.

And its bylaws may impose more restrictions. One co-op’s bylaws prohibit the community from indemnifying you if:

  • You are sued on behalf of the Corporation.
  • Your liability is due to self-dealing.
  • You have not acted in the best interests of the Corporation.
  • You have not acted with the care of an ordinarily prudent person.
  • Your liability is to the Corporation and your indemnification has not been approved by the court or the Attorney General.

Reality 6. You may have to hire and pay your own attorney. One insurer (Ironshore, 2007) won’t pay unless the community “tenders” (hands over) the defense of the claim to the insurer. What if the community fears that the cost of your defense will reduce the remaining insurance limit and increase the community’s future insurance costs? It might refuse to tender the defense. Moreover, insurance policies may fail to cover defense costs if the claim itself isn’t covered, and some insurers cover only claims for money. If the insurer doesn’t pay, the community might, but Corporations Code Section 12377 prohibits this if any of these is true:

  • You didn’t act in good faith.
  • You didn’t act in a manner you reasonably believed to be in the best interests of the corporation.
  • You didn’t act with that care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

Even if these prohibitions don’t apply, the community may choose not pay your legal costs. And, if it does agree to do so, under Corporations Code Section 12377 you must first promise to repay the community unless it is determined ultimately that you are entitled to be indemnified.

Reality 7. You might have to pay not only your own legal expenses, but also those of the persons who complained against you. This is a complex topic. It is difficult to find clear answers in the law and in some insurance policies. A cautious community member could conclude that a director might, in fact, be required to pay out of pocket for a complainant’s legal costs.


References:

Elizabeth A. Smith-Chavez, Richard J. Stratton, James R. Trembath, and Ronald W. Carrico, Real Property Litigation (California Civil Practice), Vol. 1, Section 8, “Disputes Involving Condominiums and Common Interest Developments” (Thomson Reuters, 2011).

Ironshore, Inc., “Not‐for‐Profit Entity and Directors, Officers Liability Insurance Policy”: Specimen (Ironshore, 2007).

Berkeley co-op directors: Can they pass Civics 101?

Friday, February 27th, 2015

An inspiring idea

The notion of “cooperative housing in Berkeley” may suggest democracy, transparency, free speech, and participation. For over 80 years the Berkeley Student Cooperative has given many UC Berkeley students experience in cooperative housing. Other cooperative and collective residential properties of various flavors dot the Berkeley map.

The gritty reality

Democracy sometimes loses its way, however, even in co-ops and even in Berkeley.

Case in point: Berkeley Town House (known as “BTH” by its residents), a venerable consumer cooperative corporation that owns a 60-unit apartment building 6 blocks south of the UC campus. Venerable, I say, because it reputedly was the first senior housing co-op ever established in the United States.

The year 2015 is opening with a civics lesson at BTH. On 9 January three members exercised their right (under California’s Consumer Cooperative Corporation Law) to call an election meeting of all members to vote on some (democratizing) amendments to the governing documents of the co-op.

What does the law say should have happened next? Once the petition was filed with the Secretary of the co-op, the Secretary should have notified the Board of Directors, which should have called an open meeting to schedule the election, notifying all members in advance and allowing them a reasonable time to speak at the meeting. After the Board chose an election date at that meeting, the Secretary should have “forthwith” (as the law says) arranged for all the co-op’s members to be notified of the election.

What actually happened, instead? The Board of Directors never held the required open meeting to schedule the election. Instead, the Board announced in a letter to the members that the election might take place (or might not). Then, on 25 February, almost 7 weeks after the petition was filed, the President announced at a regular Board meeting that the election would take place. The scheduling of the election was not on the agenda of that or any other Board meeting.

But that’s not all. At the same 25 February meeting Directors denigrated the petitioners and their petition, giving those in favor of it no advance notice and no opportunity to respond. One Director, the Vice-President, complained that none of the three petitioners was in attendance at the meeting. Another Director, the Secretary, stated that the petition had entailed considerable expense on consultations with a lawyer and, if the proposed amendments were adopted, would force the Board to spend yet more on legal fees. A third Director, the Treasurer, warned everybody that adopting the proposed amendments would impose unpredictable costs on the corporation, which the Board would recoup with a special assessment levied against all members.

Civics 101

What did the co-op officials get wrong?

  1. The Secretary didn’t “forthwith” get the election scheduled and give notice to the members.
  2. The Board delayed the scheduling of the election much longer than reasonably necessary to allow notice to be given “forthwith”.
  3. The Board wrote its “maybe” letter in secret and later scheduled the election in secret.
  4. The Board made secret decisions to purchase legal services in connection with the petition.
  5. The Board didn’t tell the members in advance that the above-mentioned secret meetings were going to deal with these topics.
  6. The President announced the scheduling of the election and made further remarks about it, and three Directors expressed animosity against the petitioners and the petition, at the 25 February Board meeting, even though that subject was not on the agenda.

All these acts and omissions violate provisions of the Consumer Cooperative Corporation Law or the Common Interest Development Open Meeting Act.

In addition, legal arguments might, and moral arguments certainly can, be made about:

  • The personal criticism and threats of economic sanctions directed against the petitioners and anybody who might be considering voting for the amendments. Those favoring the democratic reforms embodied in the amendments were caught off-guard and, in any case, forbidden to reply by the President. Madam President, consider this blog entry one of the rebuttals that you didn’t permit at the 25 February meeting itself.
  • The evaporation of thousands of dollars spent on legal advice, even though the law gives paint-by-numbers instructions on processing an election petition. This was, in reality, collective punishment. Don’t you dare use your powers as a member, it said, because, if you do, we’ll deplete all members’ funds and blame it on you.

Democratic transparency may be subdued at BTH, but the autocratic tactics of its Directors are transparent, indeed.

Grade so far in Civics 101 for the spring semester of 2015: F.

Moral of the story

California lawmakers have long struggled to ensure a modicum of democracy in the state’s housing communities, by enacting procedural safeguards. But these are widely violated, including at Berkeley Town House.

So why do BTH officials show such little respect for their members? Perhaps because the Directors have grown accustomed to unchallenged autonomy, and they feel threatened by a grass-roots action that would make governance at BTH more democratic and participatory.

Still, illegally dealing with an election is a risky way to flex official muscle. It threatens the validity of the election. It exposes the corporation to expensive legal challenges and a possible re-run of the election. It cements BTH’s spreading reputation as a formerly democratic but currently dysfunctional community. That’s no good for the resale value of the members’ investments. From legal, moral, and economic perspectives, BTH members are being ill-served by their officials.

Berkeley co-op waste nears half a million dollars

Monday, February 2nd, 2015

The treasurer of a Berkeley, California, senior housing cooperative announced on 28 January that the co-op had spent or lost more than $224,000 as the result of an ongoing lawsuit.

Berkeley Town House, a 60-unit building, has been involved in the suit for nearly three years. In the suit, I am the plaintiff, and 8 former co-op officials are the principal defendants. The essence of the suit is my complaint that the defendants (1) illegally wasted about a quarter-million dollars of corporate funds, which they owe back to the corporation, (2) recklessly ignored warnings of possible seismic weaknesses in the co-op building, and (3) perpetrated massive violations of legally guaranteed shareholder rights. The co-op’s insurance company has provided attorneys to defend the defendants, and also to represent the co-op, from the time the complaint was filed.

If the insurance company is paying for attorneys for the defendants and the co-op, what accounts for the co-op having incurred almost a quarter-million dollars in out-of-pocket costs? I wish I could tell you, but I can’t, because the basic facts about the co-op’s expenses—whom has it paid, when, how much, and for what—have been kept secret. Five of the co-op’s members asked to see those facts in March 2013. Nearly two years later, we are still waiting, even though state law obligates such corporations to disclose that kind of information in at most 30 days. We have received a small sample of what we asked for, but most of the time period remains an information vacuum.

Bottom line: The co-op’s officials were sued for (among other things) wasting a quarter-million dollars and keeping illegal secrets. How have they and their successors responded? By doing the same thing again, raising the waste to nearly half a million and keeping their shareholders still in the dark about how and why their money is spent.

How to bankrupt a corporation

Wednesday, July 31st, 2013

One of the most effective ways to bring a corporation to its financial knees is to put it into the hands of an arrogant, ignorant, and incompetent manager.

That’s exactly what the president of a Berkeley, California, corporation did late in 2012. Almalee Henderson, president of Berkeley Town House Cooperative Corporation (BTH), signed a contract with Bay Area Property Services (BAPS), making BAPS the manager of BTH. Thus began a financial slide into an even more precarious plight than BTH was already in.

At the time that BAPS began managing BTH, BTH had woefully inadequate internal financial controls. Its president and manager had essentially blank checks: They were spending money at their sole discretion. The board of directors, which by law was responsible for approving all expenditures, simply dozed while the corporate officials wrote checks. This regime had already resulted in the loss of an entire year’s corporate operating budget on payments to an unlicensed and uninsured contractor for work that failed so miserably that it will cost almost twice as much to correct it as BTH paid for it.

In stepped BAPS with the promise that it would cure the corporation’s financial ills. But there was no basis for such hope, because BAPS already had a poor reputation and Henderson’s secret contracting process did nothing to assure that only qualified management firms would be considered.

So, not surprisingly, BAPS in a mere nine months has brought BTH even closer to financial ruin than it already was.

Two months ago I sounded the alarm in a memorandum that I read out loud and delivered to the board of directors at a meeting of the board. I described seven financial requirements imposed by law on the corporation. For each of them, I pointed out that BAPS had failed to assure BTH’s compliance.

In the intervening two months:

  • The board of directors has not responded to my memorandum.
  • BAPS has not responded to my memorandum.
  • None of the violations reported in my memorandum has been corrected.

Thus, BAPS has further cemented its credentials as a corporate demolition specialist.