Articles

THE FINE POINTS OF FINING

by Michael Hardy Esq. ANGIUS & TERRY LLP

Fines: What Good Are They?

Almost all associations use fines to some extent to address violations of their governing documents. Some associations use them quite extensively, others only rarely. Few boards have actually considered the place fines do or should play in the management of the association’s affairs. This article is intended to aid managers and boards in developing or revising a policy on monetary penalties (fines) and in applying that policy in the day-to-day management of the association.

Monetary penalties serve two purposes. First and foremost, they allow the Board to carry out its duty to enforce the governing documents. Without a system of monetary penalties, the only way to deal with owners who violate the governing documents (other than a polite warning letter) would be an expensive and time-consuming legal action (or arbitration/mediation if the owner agrees). The Board has a fiduciary duty to enforce the governing documents and can be sued by a member of the association for failing to do so. The imposition of a fine on an owner who has been found to have violated the governing documents fulfills the Board’s enforcement duty.

The second purpose is, of course deterrence: to discourage future violations by the owner or by other owners in the development. The financial impact of a fine is usually not that significant for most owners, but the embarrassment of being fined by the association may prove to be an incentive against future violations. Of course, some violations occur because owners are not aware of the particular restriction or do not understand the scope of the restriction. Obviously, fines will have no effect on such violations, but if an association finds that a particular violation is being repeatedly violated for such a reason, the restriction needs to be re-written and/or the owners need to be educated about its existence and the penalty for violating it.

There is no inherent authority vested in an association to impose fines on its members for violations of the governing documents. It can only do so if such authority is provided in the association’s governing documents. Most CC&Rs or bylaws do give the board such authority, either directly or through the power to adopt rules relating to the management of the development. If no such authority is given in an association’s governing documents, those documents will have to be amended to provide such authority before monetary penalties may be imposed on the association members.

Just having the authority to impose fines is not enough. The authority must be exercised by the board through a schedule of monetary penalties properly adopted and distributed to the members. Civil Code Section 1363(g), part of the Davis-Stirling Common Interest Development Act, requires that such a schedule be distributed before any fines are imposed by an association. This document is considered an "Operating Rule" and must therefore be adopted in accordance with the provisions of Civil Code Sections 1357.100 - 1357.150, which require (among other things) that a proposed rule be distributed to the members for comment at least thirty days before adoption.

It is recommended (but not required) that the schedule of monetary penalties be included as part of a general enforcement policy adopted by the board. Such a policy should set out the steps to be followed in enforcing the governing documents, such as the use of courtesy warning letters for first violations and the use of alternate dispute resolution. A board may chose to simply adopt a schedule of monetary penalties, but an enforcement policy would provide guidance to the members and future boards as to the steps which will be followed for enforcement of the governing documents. This will help to assure fairness and consistency in enforcement, and avoid claims that an individual is being singled out for discipline while other member violations are ignored.

Like all provisions of an association’s governing documents, fines must be "reasonable". No statute or case law defines when the amount of a fine is, or is not, reasonable. Like all restrictions, a fine cannot be arbitrary or discriminatory and must be imposed in good faith with the best interests of the association as a whole in mind. That’s not very helpful for deciding how much the fines to be included in a schedule of monetary penalties should be.

One factor is the economic status of the community comprising the association. A $50 fine in a condominium project comprised of blue collar families may be sufficient, while the same fine in a community of $3 million single family detached residences may be essentially meaningless to the owners (however, it may still accomplish some deterrence from the embarrassment factor discussed above). Another factor is the seriousness of the violation. Actions which create a safety hazard for other persons or involve actual or potential economic losses to the association (repair of common area damage, increased insurance premiums, etc.) justify a higher fine than actions which only have an aesthetic impact (eg. improper window coverings).

Although there are no statistical studies on this issue, it is likely that if an association imposes any fine totaling more than a few hundred dollars for a single violation it will, if challenged in court, face an uphill battle in proving that the fine is reasonable. This does not mean that an association will never be permitted to impose a higher fine than $200 or $300 for a single violation; depending on the factors discussed above and the particular judge, it is possible that significantly higher fines may be allowed. However, if an association wants to minimize the possibility that a fine will be found to be unenforceable by a court, it should limit fines to a few hundred dollars per violation at most.

Some boards, in order to encourage owners to correct a continuing violation of the governing documents (such as improper window coverings or construction of an unauthorized improvement) may wish to impose a fine for each day (or week or month) the violation remains uncorrected. Such per diem fines are not improper so long as they are authorised in the association’s schedule of monetary penalties. However, boards have to be mindful not only of the amount of each per diem fine but of the total of such fines. For instance, a fine of $5 per day for improper window covering may be reasonable, but if the Board waits until such fines against an owner have accumulated for a year or more before attempting to collect them, a court may decide that a fine of more than $1800 for improper window covering is not reasonable.

Once a schedule of monetary penalties has been properly adopted, fines may be imposed for violations of the governing documents. The exact procedure followed by a particular association may vary somewhat from association to association, depending upon the association’s enforcement policy, but the Davis-Stirling Act requires a hearing before the board or before an enforcement committee prior to imposition of the fine. The owner subject to the fine must be given at least ten days advance notice of the date and time of the hearing and the general nature of the alleged violation. At the hearing, the owner or the owner’s counsel must be allowed to speak to the board concerning the alleged violation and to provide documentation for the board or committee to consider. A written notice of the board’s decision on whether to impose the fine must be delivered to the owner within fifteen days after the board has made its decision. (Civil Code §1363(h).)

Some older governing documents provide for an "after the fact" hearing process under which the board imposes a fine and the affected owner then has a right to request a hearing if he or she wishes to contest it. This process does not comply with the requirements of the Davis-Stirling Act, and should be abandoned. Any governing document which still calls for use of such a procedure should be amended.

Failure to comply with both the requirements of the association’s enforcement policy and the requirements of the Davis-Stirling act will make any fine unenforceable. Thus if the association’s enforcement policy requires that a warning letter (or courtesy notice) be provided to an owner before a fine is imposed and such a letter or notice is not provided, such an omission can be used as a defense in any attempt to collect the fine in a legal proceeding.

Okay, the board has diligently followed the requirements of the Davis-Stirling Act and its enforcement policy, held a hearing and imposed a fine, which the owner has failed to pay perhaps with a very definite statement about the board and what it can do with its fine. Now what? The simplest way to collect is an action in small claims court. It’s fast, inexpensive and doesn’t require an attorney. However, small claims court judges, who are often volunteer attorneys serving as temporary judges, have a reputation for being hostile towards homeowner associations, and unlike an action in the superior court, there is no right to appeal a bad decision (the defendant in a small claims action has the right to appeal but not the plaintiff). The board will have to weigh these risks in considering a small claims court action, but it still may be the best way to go in many cases.

An action could also be brought in the Superior Court. This process would involve filing a lawsuit and, if the owner contests the fine, eventually participating in a trial. The services of an attorney would be required for such an action, but if the association prevails the attorney’s fees and other costs could be recovered against the losing party (the judge would decide how much of the fees and costs could be recovered). Under the Davis Stirling Act, the association would have to attempt mediation or arbitration before filing the lawsuit. (Civil Code §§1369.510 - 1369.580.) One possible problem with such an action solely to collect a fine is Code of Civil Procedure Section 1033, which states that if an action which could have been brought in small claims court (which permits actions for monetary damages up to $5000) is brought in the Superior Court, the court may reduce or even eliminate any costs (including attorney’s fees) which could otherwise be recovered by the party instituting the action. However, if the association is also seeking injunctive relief to obtain a court order requiring an owner to correct a violation of the governing documents, this section would not apply, because such an action can only be brought in the Superior Court.

One remedy that is not available to collect a fine is the lien and nonjudicial foreclosure process used for delinquent regular and special assessments. The Davis-Stirling Act expressly prohibits the use of such a procedure to collect fines. (Civil Code §1367.1(e).)

The most desirable remedy for a violation of the governing documents is an amicable request to the owner to correct the violation (or not to repeat it). If this doesn’t work, then an association needs to have in place a schedule of reasonable monetary penalties and to diligently follow every step of its enforcement policy and the requirements of California law. It is also important that the Board make a reasonable effort to identify all violations and to treat them in the same manner, so that a claim of "selective enforcement" cannot be asserted by the owner subject to the fine.

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