The CotoBuzz Journal, Community Journalism

September 2008 ISSUE

We do not make jokes, we simply watch the LA Times, the Orange County Register and CID/HOA board of directors and report the facts!

LETTERS

CA Supreme Court Boots HOA's Spin Doctor's Argument

August 29, 2008

The latest missive of "spin" regarding the "GRF v. Franz" was in the process of being widely circulated when on August 27, 2008, the California Supreme Court posted its own message to GRF: "petition for review denied." Jim Gilbert has provided great insight into the thinking and strategy underlying GRF's determination in pursuing this ill-considered litigation. If Gilbert can be believed, it appears that GRF's attorneys have been providing incompetent and/or self-serving legal advice to the Board of Directors and administration.

In case you have forgotten, Jim Gilbert, a C.P.A., had served as GRF Controller as a full-time employee for about ten years until being fired in February. In June, he was elected as a GRF director by the members of Mutual 14, where he resides. The following is his best effort as a surrogate for GRF to justify the expense of continuing to appeal the decisions of the trial court and the Court of Appeal by petitioning the Supreme Court for review of the case.

This particular piece of GRF propaganda contains no information that has not been previously presented in court. In fact, Jim Gilbert himself presented testimony in a pre-trial deposition that was submitted to the trial court almost four years ago, and to the Court of Appeal only about six months ago. Gilbert's opinions and interpretations as expressed below had already been heard and considered by the courts. Obviously, the courts must not have been impressed with what Gilbert had to say, as they have consistently written judgments for respondents and against GRF in the case of GRF v. FRANZ, et al.

How we got here - the GRF side

By Jim Gilbert, former GRF Controller

Much has been said about the legal morass of the past four
years. Far too little has been said from the GRF side of the

issue. As the only member of the foundation staff that was

consistently involved, I would like to offer my recollections and

understandings of the events that led up to the court cases.

I want to point out that these are my observations and are not

to be construed as an official statement on the part of the

Foundation or its Board.

Historical Background

The Davis-Stirling Act became law in 1986. By then Leisure
World had been in existence operating under the Unrugh Act

[sic] for a quarter of a century. In 1989, the Golden Rain

Foundation of Walnut Creek, CA became embroiled in a court

case over the right to charge an initiation fee, specifically

section 1368(c) of the Davis-Stirling Act. The Superior Court

of Contra Costa County found that the Golden Rain Foundation,

Walnut Creek, CA was not an association under the Davis-Stirling

Act and therefore the Act did not apply. This decision was not

appealed.

All three Leisure Worlds were built and organized on the Seal

Beach model, so it was concluded that the opinion of the
Superior Court of Contra Costa County applied equally to Leisure

World, Seal Beach. This is the basis for the belief that GRF, Seal
Beach was not an association, and not subject to the Act.

On, or about July 2004, the Legislature amended the
Davis-Stirling Act adding paragraph [sic] 1365.2 which allowed

members of an association to look at specific books and records.

Paragraph 1363(f) of the Act, and corporate [sic] code section

8330 both provided for access to the "accounting books and

records and membership list" and these provisions existed long
before 2004. However, there were two significant changes in

[Civil Code section] 1365.2. These changes included employee

compensation by job description and a remedy in Superior Court

if access was denied with stipulated fines of $500.

Small Claims Court Action

Shortly after this law went into effect several residents made
request to see the salaries of the management staff. In their

request they cited the Davis-Stirling Act as the authority rather

than Corporate Code. Our [GRF] attorneys advised us to refuse

the request on the grounds that we were not an association;

therefore the request using the act as a basis did not apply. We

all know the small claims court outcomes. We lost the initial
suits as well as the appeals.

Suit Against the Residents

The issues argued in Small Claims Court were couched as
access to records issues but the issue Foundation wanted to

address was applicability of the Act as the authority of these

requests. After several rounds in court the Foundation agreed to

show the managers salaries. However, to address the real issue,

applicability of Davis-Stirling Act, it was necessary for the
Foundation to create another suit and this time it was a suit

against the plaintiffs of the Small Claims Court. This case would

be heard by the Orange County Superior Court.

Act Revision and Settlement Offer

Before the Orange County Superior Court finished hearing the case,

section 1362.5 of the Davis-Stirling Act was revised again. In this

revision the Legislature defined what the term "books and records"

included by introducing the concept of enhanced records. This

revision also established time frames for retention and inspection of

records and finally, expanded the applicability of this section to

include Community Service Organizations.

The Golden Rain Foundation contended in its arguments that as

an organization they were better described as a Community Service

Organizations than as Association. Therefore, the authority of the

amended Act with respect to records inspections and fines for failure

to provide access now applied to the Golden Rain Foundation as a
Community Service Organization.

The Foundation moved to settle the case at this point and concede

further arguments regarding access to records on the basis that it

was a Community Service Organization and now subject to these

provisions. The defendants didn't want to settle so the suit
continued. This further confused the court because there was no

longer an argument regarding inspection rights.

The issue before the court was finally reduced to the argument of

the status of the Golden Rain Foundation as an Association,

Community Service Organization or a Management Company.

Superior Court Decision

The Superior Court ruled that Golden Rain Foundation was an
Association under the Act. Further, the court found that the

common interest development GRF managed (a requirement

under the Act) as an Association was Leisure World.

If the Orange County Superior Court had ruled that the Golden
Rain Foundation was an Association and the related Common
Interest Development was the Golden Rain Foundation Trust,

an appeal may have been questionable. However, the Orange

County Superior Court ruled that the Golden Rain Foundation

was an Association and that the related common interest
development was an entity called Leisure World.

To further complicate matters, the Court defined Leisure World

as, in short, all the property inside walls of Leisure World. This

definition disqualifies the Mutual Corporations from doing their

historical roles of managing their internal affairs under the Act,

a Common Interest Development can have only one Association.

The Orange County Superior Court tried to work around this by

describing Leisure World as having Master and Sub-Master

associations.

The Appellate Court

Another attempt to clarify the matter was needed, thus the
process moved to the Appellate Court. Instead of reversing or

clarifying the Orange County Superior Court's decision the

Appellate Court confirmed the lower Court's decision with

respect to Golden Rain Foundation's status as an Association

and confirmed the common interest development as Leisure

World but failed to address the Master and Sub-Master

Association. It left that up to future litigation.

The Unintended Consequences

In the days prior to 2004, the Foundation and the Mutual
Corporations operated on relationships that were established to

meet the requirement of the loan guarantor (HUD). Those

relationships were set forth in the Trust Agreement, Management

Agreements and the Regulatory Agreements. Under these
agreements the Golden Rain Foundation was subordinate to
the Mutual Corporations. Under the Management Agreements,

the Mutual Corporation could terminate the Foundation as

business manager with a 30-day notice. With 100% consent of

all the Mutual Corporations, the Golden Rain Trust could

be dissolved and a new Trust with a new Trustee appointed

(admittedly a difficult but not impossible task).

Now these roles have flipped. Under Davis-Stirling there is no

provision for a Common Interest Development to fire its Association.

An Association can fire its property manager, but it can't fire itself.

Worst of all is the authority to deal with separate interest conflict.

Once, this was the job of the Mutual Corporation now it's the job of

the Foundation. This is the reason the Foundation fought the fight in

the first place.

When dealing with the Davis-Stirling Act an Association doesn't get

to choose to enforce what sections it likes; it has the responsibility

for the entire Act. This is the argument for the final appeal to the

Supreme Court.

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