Archive for October, 2016

Primers on common interest developments

Monday, October 31st, 2016

Many homes (including an estimated one-quarter of all homes in California) consist of units in “common interest developments” (CIDs), a collection of residence types between being a property owner and being a tenant. They are also called housing communities and community associations.

CIDs are complicated. They have some features of apartment buildings, neighborhoods, and towns, and other features peculiar to CIDs.

Here are a couple of gentle introductions to CIDs in California, for current and prospective members:

Agenda? What’s that?

Sunday, October 30th, 2016

Some laws require things they don’t define.

“Agenda” is one of those things.

A quarter of Californians live in “common interest developments”, such as condominium associations and cooperatives, and those CIDs must govern themselves in accord with the Civil Code, which requires their boards of directors to announce the agendas of meetings in advance.

But what is an agenda? The law doesn’t say. So, what do lawyers do when their clients ask them how to comply? Here’s what one lawyer does: Adrian Adams, Esq., says he looks up “agenda” in Complete Idiot’s Guide to Parliamentary Procedure. There he finds the statement:

If you really want to manage your meeting, you need an agenda. With an agenda, the specific items that are expected to come up at a meeting are placed into the order of business.

So, there you have it. You can pay your attorney to look it up in the Complete Idiot’s Guide, copy it, and send it to you. Or you can look it up yourself.

Actually, Adams deserves credit for a bit more than that, because he gives advice and an example. He says an agenda must be specific enough to let those who read it anticipate what will be discussed. His example is “Maintenance”, which, he says, would not be specific enough to forewarn readers that the board is going to discuss major projects such as reroofing a building.

Should you rely on that advice? Adams cites no other authority for this assertion, so presumably he is the authority, but he’s one attorney among thousands. And how does this example generalize? Can “maintenance” ever be an agenda item? If so, what can it cover? Could “reroofing” cover everything from a discussion of the roof’s life expectancy to awarding a contract for a reroofing job, or would the agenda need to disclose that a contract might be awarded at the meeting? What can the president talk about under “President’s report”? If “Assessments” appeared in an agenda, could the board then increase everybody’s monthly payment by 20%? Don’t ask me. Unlike Adams, I don’t claim to know.

Berkeley co-op lawsuit to end; what next?

Thursday, October 20th, 2016

Lawsuit news

On 18 October 2016 Judge George C. Hernandez, Jr., of the Alameda County Superior Court issued an order granting a motion asking the court to approve a settlement of two lawsuits, originating 4 years ago, involving the governance of Berkeley senior housing cooperative Berkeley Town House (“BTH”).

Hernandez ordered plaintiff Jonathan Pool to file a proposed order within a week for Hernandez to sign, approving the settlement.

Next steps

Once Hernandez signs the order, the settlement will require BTH and Pool to perform various services, with deadlines mostly measured in days after the day when the judge signs the approval:

  • Within 10 days after the approval date, BTH is required to give Pool:
    • A final financial statement for the fiscal year 2010–2011.
    • The general ledger of each BTH account from April 2010 until the approval date.
    • A disclosure of matters discussed during 9 closed meetings of the Board of Directors in 2010.
  • Pool is allowed 20 days after receiving these documents to request any supplementary documentation of transactions in the general ledger.
  • Within 20 days after such a request from Pool, BTH is required to provide the requested supplementary documentation.
  • Within 60 days after the approval date, BTH is required to conduct a general meeting of its members at which the recreational use of the BTH building’s roof is discussed.
  • Within 90 days after the approval date, BTH is required to change its rules to allow any 3 BTH members to have topics placed on the agenda of the Board of Directors.
  • Within a “reasonable” time after the approval date, Pool is required to organize a meeting for BTH members with an expert about a report on the seismic condition of the BTH building and related issues.
  • Within 60 days after the meeting organized by Pool, BTH is required to hold a meeting of its Board of Directors on seismic issues.
  • By 31 March 2017, BTH is required to have its governing documents reviewed to ensure that they comply with the California Civil Code provisions on housing communities.

This order follows a hearing on 4 October and an opportunity for BTH members to submit comments to the court about the proposed settlement. The comments submitted in writing are part of the record of the litigation.

Litigated issues

Pool filed the first lawsuit in March 2012, claiming legal violations by 7 directors and former directors and a former manager of BTH. Pool complained that they had wasted over $200,000 in illegal payments for botched construction by an unlicensed contractor, neglected credible warnings of possible seismic defects in the BTH building, failed to exercise required financial oversight, and violated numerous rights of BTH members. Several attempts were made to settle the litigation over 4 years. One of those attempts resulted in a dispute over a settlement offer, producing further litigation, in which the Court of Appeal ruled that the defendants had fraudulently accepted Pool’s offer while intending to violate its terms. This ruling led to a second lawsuit filed by Pool in July 2015.

Lessons learned?

Has this litigation taught lessons for dealing with future disputes? Acutely aware of conflict as a problem in housing communities, as the litigation was nearing its end a group of six BTH members and residents hosted a meeting of East Bay housing co-ops on the management, resolution, and prevention of conflict. Three local experts gave advice and answered questions from members of East Bay co-ops in the packed BTH dining room. Key points:

  • Senior-only housing communities suffer from more conflict than average, casting doubt on the idea that conflict-prevention skills become stronger with age.
  • To minimize the risk of conflict over the rules of a housing community, permit the membership to participate effectively in the formation of the rules.
  • The more effective your institutions for internal dispute resolution are, the less likely are disputes to escalate into litigation.
  • Resolutions of disputes do not finish the disputes. As time passes and conditions change, revisit the issues and adjust your responses to keep peace robust.
  • When you resolve a dispute, don’t trust your memory: Put the agreement in writing.

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.

Berkeley co-op: peace at last, or more litigation?

Wednesday, October 5th, 2016

Why we fight

Berkeley senior housing co-op Berkeley Town House (a.k.a. “BTH”) has been immersed in civil litigation for more than 4½ years. If you want to know what it’s all about, and who the participants are, be my guest. The short version: It’s about life and death, money, power, and promise-keeping; and I, being the plaintiff, am the one who’s generally credited with starting it all (which, of course, I dispute).

We gather in court

On 4 October, 2016, there was a court hearing in Oakland, possibly the final hearing in this litigation. Its purpose was to let the court evaluate a proposed settlement. BTH and I, with the participation of seven lawyers and two mediators over four years, had reached agreement on it in June, one day before the first of two trials was scheduled to begin. Now the question before the court was: Is the settlement OK? More specifically, is it fair to BTH and those of its 60 shareholders who have not been participating in the litigation?

Arguments for a “yes” answer to this question had already been filed by my attorney and by BTH’s attorney. Numerous written comments had been submitted to the court, for and against the settlement, by current and former BTH residents. My attorney had filed a reply to the comments. But, conspicuously, the attorney representing seven of the individual defendants had filed nothing.

Five of the attorneys, seven BTH residents, and BTH’s office manager showed up for the hearing at 2:30 p.m. There were eleven cases on the calendar. From 3 to 4:15 p.m., the court dealt with ours. A court reporter took down every word (enough to fill 50 pages, she said). Here’s a synopsis of what transpired. If you don’t care what anybody said, but only what the judge decided, you can skip to the end.

Judge: Is this a proper settlement?

First, Alameda County Superior Court Judge George C. Hernandez, Jr., summarized the purpose of the hearing. He stated that this litigation is “derivative”, a subtype of a “representative”, lawsuit, in which a plaintiff files suit for the benefit of an entity or a class of persons. He said that, in such lawsuits, the court must ensure that any settlement is appropriate and conforms to the court’s standards. For this purpose, he said, all the parties to the litigation could proceed to explain their positions, and after that others could tell the court whatever they wanted to say.

This procedure differed from the one that had been announced, possibly disadvantaging some would-be commenters, but, after a brief discussion, the attorneys agreed to let the hearing continue.

My lawyer: Yes, it passes all the legal tests

David H. Schwartz, one of my attorneys, began. He pointed out that the law gives the court the power to approve or disapprove (but not to modify) a derivative settlement, and confers considerable discretion on the court, but requires that the decision be based on specific criteria:

  • Arms-length negotiation. While numerous persons had written to the court disagreeing with the settlement terms, none of them, Schwartz said, had suggested that BTH and I had engaged in any collusion.
  • Sufficient investigation and discovery. Schwartz said that I had many related documents in my possession and had obtained testimony in depositions from most of the defendants and from several experts. These, he said, provided a satisfactory factual basis for my evaluation of settlement terms.
  • Experienced counsel. Schwartz said he had litigated seven or eight derivative actions before taking on this one.
  • Amount of opposition to the settlement among affected persons. Schwartz said that those opposing the settlement terms were fewer than one-third of the BTH membership. While some expressed discontent with the extent of BTH’s consessions to me, the objections were based on enmity between groups of members and not on the merits of the settlement. Finally, said Schwartz, not even one of the written comments proposed taking these cases to trial.

Schwartz then argued that persons opposing the settlement had insufficient information to base their opinions on. They had no access to the facts obtained during the discovery process, nor to the advice of attorneys.

Schwartz proceeded to summarize the issues in the litigation and its history. Early in the litigation, he said, there was a successful struggle to get attorney Fred M. Feller disqualified as an attorney representing both BTH and seven of the persons accused of harming BTH. Feller’s disqualification, he said, led to the appointment of Dennis F. Moriarty as BTH’s attorney, and only then did it become possible to reach a settlement, namely one entered into by BTH and me alone, without the individual defendants being involved.

Schwartz’s next argument was that the settlement was a good deal for BTH.

  • First, he said, it secures for BTH a money payment of $224,415, obtained from two contractors, who otherwise would have paid nothing back to BTH. True, it wasn’t the $400,000 that redoing the contractors’ work had been estimated to cost, but it was a full return of what BTH had paid and was paid to BTH without any deduction for litigation costs, he said. But why not go to trial and try to win the whole $400,000? Schwartz said that would be risky. It would require proving that the defendants who hired the contractors had committed “gross negligence”. In a business corporation, he said, that could probably be proven, but these defendants were elderly and unpaid volunteers, without business education, and there is reason to worry about whether a jury or judge would find their negligence to have been gross. Schwartz noted that any money judgment won in a trial would be against the individual defendants, and pursuing such a judgment would prolong the anxiety naturally felt by such defendants about whether they would be found liable and, if so, whether their liability would be covered by insurance. This anxiety would be contagious, affecting the tranquality of the whole housing community.
  • Second, Schwartz described the settlement as overcoming the chronic denial at BTH of the risk of catastrophic structural failure of its building in a large earthquake. He said government agencies and engineers had warned BTH repeatedly of the building’s vulnerability to seismic risks and the need to investigate this issue. He said the issue was not whether to perform remedial measures, since neither I nor anybody else had enough information to know whether they were necessary, prudent, and affordable, but rather what investigation to do. He argued that BTH’s directors have a duty to do something in response to the warnings, given the potential impact of an earthquake on life, physical safety, and what for many members are their life savings. Under the settlement, he said, all BTH members received a report on the building by a highly qualified seismic engineer and there will be a process for a decision on what to do.
  • Third, Schwartz described what he called three significant improvements in BTH governance brought about by the settlement. One was that Board will hire counsel to review the BTH governing documents to make them comply with California’s Davis-Stirling Common Interest Development Act, thereby dealing with numerous violations of that act that I had claimed the defendants had committed. Another improvement was that the President will no longer have a monopoly on agenda formation, but instead any three members of BTH will have the right to submit a matter and have it added to the agenda of the next meeting of the Board of Directors. Finally, BTH members, including me, had been asking fruitlessly to see BTH financial data, and under the settlement BTH will provide such data to me. (Schwartz had already explained, on page 18 of the motion to approve the settlement that he had filed in July, how this will enable all BTH members to get the same records.)

Schwartz concluded by addressing criticisms contained in some of the comments submitted to the court. Some comments opposed the settlement’s reimbursement of my attorney fees and costs. Schwartz described that opposition as legally untenable, because he had shown that the rates charged me and the amount of time spent were reasonable. Moreover, he said, the reimbursement is limited to $310,000, while my actual fee obligation will be $110,000 more than that. He said I am not happy with being less than fully reimbursed, but accept that compromise. Conversely, what if the settlement were rejected and there were a trial? Then, Schwartz said, I might get all of my fees and costs reimbursed, and who would pay them? Would the insurer agree to pay them? Could it be forced to pay them? This, Schwartz said, is uncertain, and eliminating the risk to BTH of a much larger uninsured liability is a reason why the approval of the settlement would benefit BTH. Even the harshest critics say they want the case settled, said Schwartz, and the fastest way to end the case is to approve the settlement.

BTH’s lawyer: Yes, and BTH needs this

Representing BTH, Moriarty said he agreed with some but not all of the argument that Schwartz had made. Still, he said, BTH wants the case settled. $224,000 has been received. A seismic rehabilitation of the building is not required by the settlement, just as it is not required by any existing law, but it will be considered, he said. He described the governance concessions made by BTH as acceptable. He reminded the court that BTH is a senior residence and said the litigation had made this a tumultuous time for the community. Ending the litigation would, he said, make it possible to restore peace for those living at BTH. Moriarty said that some BTH members were attending the hearing, and he called to their attention that there had been three full days of mediation, plus tireless work by the Board of Directors and its Litigation Committee, particularly by Sharon Shen, to reach a settlement.

Defendants’ lawyer: No, but it’s OK, but not really

Feller followed by confessing that he was in a “strange position” and said he was debating with himself whether to say anything, since up to now in this litigation whenever he had advocated anything the court had done the exact opposite. The settlement would, he said, take his seven clients “off the hook”, and this absolution from personal liability was the condition they had imposed on their consent to a settlement. And yet, despite their complete release under the settlement, three of his clients had signed comments opposing the settlement. This might, he said, create a conflict of interest for him. What should he do? First, he said, he wanted to reassure the court that he was not opposing the settlement at all. However, the settlement was obviously encountering massive opposition, with, he said, only one person submitting a comment favoring it, and twenty against. Moreover, he noted, the $224,415 claimed as a benefit of the settlement had already been received by BTH and could not be taken away again even if the settlement were rejected.

Creative nonfiction begins

Feller at this point was starting to ramble and create his own reality. His claim that only one commenter had favored the settlement was just plain wrong: There were four commenters advocating approval of the settlement, and one more advocating that it be further strengthened in favor of my positions. In addition, he was correct about the $224,415 being safe, but not really, because under the settlement the BTH insurer agrees not to demand any deduction from that amount for its or my legal costs in getting that payment; without the settlement, the insurance policy says the insurer could charge BTH for those costs.

Feller’s meandering continued with a resentful account of the disqualification dispute that Schwartz had discussed. According to Feller, the previous judge in this litigation, Steven A. Brick, had ordered a “vote of members” to decide whether Feller would be allowed to continue representing BTH in addition to his individual clients, and Feller had “won” that vote, but Schwartz had managed to get the court to invalidate the result.

This was another falsehood: Brick had never ordered a vote. He had issued a ruling finding that Feller’s joint representation did, indeed, create a conflict of interest, and permitting Feller and BTH’s house counsel, Stephanie J. Hayes, to obtain, if they could, valid waivers of that conflict from a majority of the disinterested members of BTH in accord with applicable law. Brick had told Feller that he and Hayes would know what that law is and how to comply with it. Feller and Hayes had then disregarded applicable law by conducting a vote, without giving any of the required disclosures to those voting. The court had ruled this maneuver illegal and had disqualified Feller.

A new (but really old) idea

Feller finally swerved into the opposite lane and crashed. He resurrected a refrain that he had been singing for the past four years: my lack of standing to make derivative claims against his clients. He had promised repeatedly to bring a motion asking the court to disqualify me, but had never done so. Now he made one more attempt, by proposing that the court now schedule a hearing on that issue. If I won, he said, the settlement should be approved. If I lost, however, my complaints should simply be dismissed.

Judge to lawyer: Stop this

Judge Hernandez stopped Feller here. Several times, Hernandez told Feller that the court had no power to act on his proposal. The court was facing a simple choice: to approve or disapprove the settlement. Feller, said the judge, had been able to file an opposition to my motion to approve the settlement, giving his argument against my standing as a basis for disapproval. Feller, earlier, could have moved for my disqualification. Had he done so, the other parties in the litigation would undoubtedly have had something to say in response. But Feller had filed nothing, and now he was springing a surprise proposal that wasn’t on the court’s agenda.

Feller persisted. No, he said, in a derivative action the court always has the power to disaqualify the plaintiff. You could do this on your own motion, he told Judge Hernandez. Hernandez was not persuaded.

Lawyers to lawyer: You are wrong

Then Moriarty responded to Feller on this point. He said counsel for BTH had, indeed, considered, and done research on, the question of my standing as a derivative plaintiff, and had decided, as a result, not to challenge me on that issue.

Schwartz continued the response to Feller, claiming that the first case had been filed in 2012 and that, since then, no new facts had become known. Schwartz said, if there had been a basis for challenging my standing, BTH or the individual defendants could have done so, but there was no such basis. What the law requires, said Schwartz, is that I have been a member of BTH when the alleged acts took place and remain a member until the end of the litigation, something that has indeed been true. He said the law entitles me to object to ultra vires acts by persons governing the corporation, whether or not my positions are popular among other members. It has been known “since day one”, he said, that my lawsuits are unpopular at BTH, but that doesn’t deprive me of my legal rights.

Schwartz then commented on the practicality of Feller’s proposal, even if it were legal. What if it were adopted? Then there would be more briefing and another hearing, costing more money. Would the insurer agree to reimburse me for that additional expense? Presumably not. What would I then do? With more than a 50% probability, said Schwartz, I would refuse to cooperate with this plan and, instead, opt to take the cases to trial. In conclusion, a rejection of the settlement by the court, in pursuit of Feller’s idea or for any other reason, would probably doom the settlement.

This ended the attorneys’ arguments, and Judge Hernandez then asked whether anybody else in the room wanted to be heard.

BTH residents rise up in disunison

Resident 1: BTH did a fine job

Sharon Shen, current President of BTH, was recognized. She told the court that she is not only on the Board of Directors but also on the Litigation Committee, and said that some commenters had called the committee unqualified. She rebutted that accusation, saying that she had been a contracting officer with many years of experience; the other committee member, Raj Chabra, is an experienced attorney in private practice; and the committee has its own counsel, Joe Hoffman, a highly qualified attorney. Shen said that the Board and Litigation Committee had negotiated intensively for months and, in the end, daily.

Shen also argued for the merits of the settlement itself. She said it obligated BTH to consider issues but not take particular actions. She acknowledged that it required BTH to provide records. She called the issues complex. Why, then, she asked, the outpouring of anger and criticism? Her answer: It is hard for persons outside BTH to understand how painful five years of this litigation has been. The defendants, she said, were threatened with financial ruin. She said she understood the deep emotions of anger, animosity, and fear experienced by some in BTH. However, she said, that cannot be undone. This settlement, she argued, would permit BTH to return to peace and harmony.

Resident 2: We’re mad as hell

After Shen, Paula Pehl, a non-member resident of BTH, who had already submitted a 13-page comment (7 pages of single-spaced narrative and 6 pages of addenda), was recognized. In her oral testimony, Pehl repeated some of her written condemnations of my ulterior motives, evil designs, threats, defamations, and illegal acts, while adding some, but in a surprise reversal reached the opposite conclusion. While her written comment had urged the court to award me only $1.00 in legal fees and costs, rather than $310,000, and to modify numerous terms in the settlement, now she told the court that BTH needs to have this litigation ended and she was not opposing the approval of the settlement. She said she was speaking only for the purpose of ensuring that the court knows what a horrible injustice has been done here (thus implying that the court had not read and would not read her written comment).

Pehl then turned her attention to Feller and scolded him for failing to challenge (until it was too late) my standing as a plaintiff bringing derivative claims (thus implying that Feller was right and Moriarty was wrong about the probability of winning such a challenge). She said I had been damaging BTH in the guise of representing its interests ever since moving there. She added that my falsification of meeting minutes and my violation of fiduciary duties had led to my recall from the Board of Directors, the only such recall in the five decades of BTH’s history. She said the people of BTH were angry because they have never had a voice.

Resident 3: Get your facts straight, lawyer

Finally, Susan Colowick, another non-member resident of BTH, was recognized. Colowick informed the court that Feller had been wrong in his arithmetic, because not one, but three or four, members had submitted written comments in favor of the settlement. Colowick also said that several of those whom Feller counted as opponents of the settlement were not BTH members, and some of them did not even live at BTH any longer.

Judge: Tell me what you want

Judge Hernandez concluded the hearing by announcing that he would make a decision to approve or disapprove the settlement after he receives a proposed order from the parties in the litigation. Schwartz and Moriarty replied that they would provide such an order to the court.