HOA Corporate Status – Unraveled?? Stitch It UP!!

by ca condo guru | January 29, 2011 1:06 pm

I have been writing blogs on the subject of corporate status and recently wrote one called “Check Your Corporate Status.” I got occasional email questions before – now they are coming in from board members who find out and want to know what to do, and owners who have found out for various reasons (denied loans, denied FHA consideration, some transaction relate to their property gone awry, etc.) and are mad. I put “feelers” out in a blog to find out whether the suspended corporate status affects the ability to get insurance, keep it, or if it affects claims.

Here is a combination (paraphrased) of the email questions from owners that have come in recently (Boards, take note!):

I/We am/are a homeowner(s) in a condo association. Our corporate status has been suspended for quite some time apparently and the board of directors is ignoring this. The board continues to spend money and increase regular and impose special assessments. They continue to sign big contracts and commit the association to debt, and besides that they conduct business by email and shut the members out. Can you give us some help as to how to get through to the Board that they need to be more responsible?

First, I suggest Boards take this to heart. If the incorporated HOA or Condo Association fails to file the TWO statements required by the Secretary of State on a biennial basis, it is subject to a small fine but that’s not the bad part. If it does nothing to correct the problem, it is subject to being deemed “Suspended”. The information on the delinquency goes to the Franchise Tax Board so they become involved. If a corporation loses its “active” status and suspended, per the Davis Stirling Act, (see below) loses its “rights, privileges and powers as a corporation.” That’s the bad part.

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” California Civil Code Section 1363.6:

(d) On and after January 1, 2006, the penalty for an incorporated

association’s noncompliance with the initial or biennial filing

requirements of this section shall be suspension of the association’s

rights, privileges, and powers as a corporation and monetary

penalties, to the same extent and in the same manner as suspension

and monetary penalties imposed pursuant to Section 8810 of the

Corporations Code.”

**

Every act of the Board thereafter can be called into question! As to the question of whether this affects the HOA’s insurability, I did get some responses (thanks to readers who have the right insight). Here is an educated answer:

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This from Steve Joskowitz at www.bayrisk.com.

“Answer to your question:

Based on my experience as a territory manager for Hartford Commercial, even if corporate status is suspended, insurance companies will cover a claim. Many insurance companies however, will periodically check with the Secretary of State (http://kepler.sos.ca.gov/) to verify corporate status, especially upon a new policy being initiated or renewal. They may reserve the right not to offer a new or renewed policy based on a negative corporate status. This is more prevelent in situations where the insurance provider has deemed the company to have a higher risk exposure than normal or one that has a high loss experience.

I agree with you that HOAs should check corpoate status periodically (http://kepler.sos.ca.gov/). Unraveling suspended and/or forefeited corporations can be cumbersome and costly.

Here’s another useful FAQs link to CA secretary of state;

http://www.sos.ca.gov/business/be/faqs.htm#copies-question2*

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Thanks, Steve!

There are lots of HOA and Condo Associations running along just fine even when they know or don’t know their corporate status has gone suspended. The Secretary of State doesn’t even send out notices once the corporation status is suspended.

Now, think about this – there are lots of drivers on the road that do not have insurance, even though it is required by law. Some drivers are not aware that their vehicle registrations have expired. Sometimes (as once happened to me) someone stole the current year sticker right off the plate!

All these folks have lost their privilege and right to drive their vehicles on the roads of California – but they do so anyway! Things are fine until they get caught, either by a moving violation or accident. (For me, it happened when I lent my vehicle to a friend who got stopped for expired plates – Embarrassing!) So, when the “blip” occurs, they are “caught”. The penalties are wide ranging from “no serious ramifications” (so long as the problem is rectified immediately) to possible monetary and jail possibilities. The penalties imposed depend on things like whether they knew or should have known, whether the oversight was innocent or willful, and whether the traffic violation is serious or whether the damage caused if an accident occurs is minor or serious. An uninsured driver can end up in jail!

Running an HOA or Condo Association when the corporate status is suspended is similar to that. You may get away with it for awhile, but it may catch up to you big-time. As a board member, it could become a serious breach of fiduciary duty issue, and maybe worse, it could cause the unraveling of a critical project such as a substantial rehabilitation or construction project, an attempt to get a much needed HOA loan, or the like. And if there are other violations of duty involved in addition to letting the corporate status go or stay suspended, then it is possible that the usual protections in the law and insurance for “acting in good faith” will not protect you as an individual serving on the board.

So the best advice I can give is

Keep your address current with the Secretary of State.

File the required reports on time.

Check the status periodically.

Pay attention to warnings that come in the mail!

AND

If the status is suspended, take the steps necessary to get reinstated as “Active”!!!

What more can I say?

 

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