The General Manager of HROA was asked to provide the following information which has been approved by the Board of Directors, and by Association legal counsel to be factual.  This document is only for the use of the HROA and intended to be presented in its entirety.  Any dissemination, distribution, summarization, excerpts, copying or presentation in any other format is strictly prohibited.

BACKGROUND

On Tuesday, June 10, 2008 four property owners, one of whom was a former Board Member, made an appointment to review the financial records at the Association Office.  Staff and I spent approximately four hours going through those records with them and answering all questions.  The focus was litigation costs.

On Tuesday, June 17, 2008 three (of the four) property owners made a second appointment to again review the financial records. Staff and I spent an approximate additional four hours going through those records with them and answering all questions.

On both occasions, all information was presented to the property owners in an organized manner and readily available for review (except the attorney bills themselves which are confidential) for the past three fiscal years.  The property owners wanted a broader scope of information and after a third contact with one of the property owners, I did go beyond expectations by suggesting I might provide a written summary from 2002 to current for better comprehension.

At the July 11, 2008 Board Meeting, where this was again discussed during member comments, I offered to provide a written summary for the purpose of putting this matter to rest, which was informally met with support from the Board of Directors.  The property owners had requested me to itemize all litigations HROA has been involved in from 2002 to current which is the format of Part I of the summary below[1].   I also included a summary of all general legal advice obtained during this same period, which is the format of Part II of the summary below.  In the future I do believe the most appropriate response would be to channel these types of inquiries to our normal resources (such as the Finance Committee meetings), or to suggest they come to the Association Office and look through the information themselves, and then expect if they do not do so in a timely matter, that management would not be expected to provide detailed information over a large period of time catered to them specifically.  Staff and I would not have the time to dedicate similar resources for all other property owners “unlimited” inquiries in the future and do not want this to appear to set precedence.  It should also be noted that approximately 80% of all questions asked had been already provided for through various HROA resources (HERALDS, website, audit, special mailings, etc.)

SUMMARY

Prepared for August 8, 2008

Board of Directors Meeting

From 2002 to current (6 fiscal years) the HROA has incurred a total of $711,000.00 in legal bills, which is an average of $118,500.00 per year. 

Of the $711,000.00 total in legal bills, approximately $400,000.00 ($66,667.00 average/year) has been spent against various litigation issues, and the balance of approximately $300,000.00 ($50,000 average/year) has been spent for general legal counsel.  All legal bills are paid monthly and kept current with no outstanding debts owed.  All legal bills have been paid out of our Operating Account.

PART I

To summarize the lawsuits filed by HROA or against HROA in the last six years, they are as follows (approximately $400,000.00 in legal bills):

1.  In 2002, under the previous general manager, there was a lawsuit in process that had been filed in November 2001 against HROA and certain Board Members known as the “Ellison v. HROA” lawsuit.  That lawsuit had been turned over to HROA’s previous insurance carrier, and was eventually negotiated in September 2002 by the Board of Directors at that time into an approximate $50,000.00 settlement paid (by the previous insurance carrier) to Ellison contingent on the fact that six specific individuals would be pursued under separate litigation initiated by HROA.  The HROA Board of Directors consulted with two attorneys over the course of seven months which resulted in the filing of a lawsuit in April 2003 known as the “HROA v. Dorsey, Heath et al” lawsuit.  That lawsuit eventually involved the developers and past accountant and attorney.  The past accountant and attorney portion of that lawsuit settled without monies being paid by either party.  Regarding the developer portion of that lawsuit HROA and the developers eventually signed a settlement agreement in 2006 (supported unanimously by the HROA Board) resulting in up to $10,000,000.00 being paid to HROA, and which has been widely publicized and posted on the HROA website[2].  Both parties agreed to waive pursing the recovery of the litigation costs as part of that 2006 settlement agreement.  Regarding the “Dorsey, Heath et al” portion of that lawsuit due to the settlement agreement eventually signed in 2007, HROA cannot publish any information other than what has already been published.

2.  In 2003 a past employee filed a lawsuit against HROA which became known as the “Peterson v. HROA” lawsuit.  That lawsuit was filed against HROA and against then President of the Board Elaine Hollingsworth, citing actions taken in July 2002 and prior.  This was a personnel issue and was eventually turned over to the HROA insurance carrier who requested HROA use mediation to settle the matter.  An undisclosed amount of settlement was paid by HROA and some legal bills by HROA were also incurred.   This combined total cannot be disclosed to avoid violating the settlement agreement of non-disclosure of the settlement amount.

3.  In 2004 the developers (King Ventures and HR Holdings) filed three election-related lawsuits against HROA, “Developers v. HROA”.  The developer’s goal was to seat HROA Board Member candidates: John Allen, Bill Barker and Dan Heath.  (Provisional ballots for John Allen, Bill Barker and Dan Heath were set aside by the court during the dispute.)  King Ventures was also disputing $34,000.00 owed to HROA in past-due assessments as part of those lawsuits.  Since John Allen was already seated due to the votes he received, and Dan Heath would not receive enough votes to be seated even if the provisional ballots were counted, the matter was limited to seating Bill Barker if the judge determined the provisional ballots were to be counted[3].   The developers lost on all three “Developers v. HROA” lawsuits.  The $34,000.00 assessment portion of the dispute eventually went to trial for which King Ventures also lost and paid HROA the past-due assessments in total. The estimated costs incurred by HROA for defending themselves on all of these actions were approximately $70,000.00.  HROA ultimately agreed to waive pursing the recovery of the litigation costs as part of the 2006 settlement agreement with the developers described above.

4.  In 2004 developer David Weyrich sued HROA over an easement dispute, “Weyrich v. HROA”, leading to the certificate parcels.  Documents used in this dispute dated back to the early 1980s focusing on Lot 134 of Tract 424 and Lot 86 of Tract 693.  The judge ruled in David Weyrich’s favor regarding Lot 86 of Tract 693 only.  Lot 134 of Tract 424 was excluded from that decision and the intended use of the easement over Lot 86 of Tract 693 was not specified.  Ultimately, in lieu of filing an appeal and in an attempt to reach a global settlement with all developers, a settlement incurred whereby David Weyrich paid HROA $50,000.00 in exchange for specific easement rights over both Lot 134 of Tract 424 and Lot 86 of Tract 693.  HROA incurred approximately $75,000.00 in legal bills on this matter and David Weyrich agreed to waive pursing the recovery of his litigation costs as part of the 2006 settlement agreement with the developers described above.

5.  In 2005 HROA made preliminary arrangements to initiate suit against SLO County and Tract 1990 LLC regarding a purported attempt to make Tract 1990 not part of HROA, and instead make this tract part of a golf-course development to ultimately be combined with Nacimiento Lake Park (Waterworld).  This plan was first conceived and put in motion in the late 1980s and early 1990s through the tentative tract map approval process.  This matter was settled within a few months (with two HROA Directors opposed to that settlement).  Tract 1990 LLC paid HROA $7,500.00 as part of that settlement agreement which also required Tract 1990 LLC to turn over all common areas in Tract 1990 to HROA and pay for and construct the North Gatehouse on Heritage Loop Road for a cost not to exceed $140,000.00.  This also triggered the required completion of Heritage Loop Road to connect to Heritage Road.  HROA incurred approximately $30,000.00 in legal bills on this matter.

6.  In 2007 the law firm of Heily & Blasé, who previously represented HROA, filed a lawsuit against HROA regarding a reward to purportedly be paid to Heily and Blasé against a portion of the 2006 settlement agreement described above between HROA and the developers.  That lawsuit was dismissed.   Approximately $5,000.00 was spent by HROA on this matter.

7.  In 2007 HROA filed a lawsuit against Lot 87 of Tract 446, “HROA v. Stanley” regarding a common area encroachment after three years of attempted negotiations failed.  To date HROA has spent approximately $5,000.00 on this matter.

8.  Presently HROA is in the process of filing a quiet-title action against Lot 15 of the 20 acres, “HROA v. Brock”, regarding a septic tank dispute which services the Main Gatehouse.  This issue first surfaced when a past Board Member misrepresented themselves as the owner of Lot 15 of the 20 acres and filed a complaint to SLO County, followed by over a year waiting for promises from Brock to resolve the matter which were never fulfilled.  Approximately $5,000.00 has been spent in preliminary investigation on this matter.

PART II

To summarize the general legal advice needed during the last six years (approximately $300,000.00 in legal bills):

1.  Development: Since 2002 there has been significant activity involving new development.  Many of the past practices of the two previous developers, Reeder and Heath, along with the great span of time since development had incurred prior, compounded HROA’s legal bills in this area.  There have also been on-going legal bills regarding various general development issues.  Thousands of pages of documents had to be retrieved which lead to discovery through research that there were numerous inconsistencies and inaccuracies in filings to SLO County, the Department of Real Estate, missing maps, open space deeds not recorded, portions of roads held back by developers, illegally altered CC&Rs, etc. 

Some of the general development issues legal counsel has been needed for include: CC&R review, assessment agreements, General Plan review, appearances at County public hearings, easement documents, recording maps, open space transfers, bonding, etc.  In the last four years, there have been two General Plan Amendments introduced to SLO County.  The present General Plan Amendment is in process, and is being monitored by our legal counsel to assure its compatibility with the 2006 settlement agreement described above, and future benefit interests of HROA.  Our legal counsel is also presently working with SLO County to transfer the first approximately 1,000 feet of Heritage Loop Road near the commercial center over to SLO County for maintenance purposes along with researching various other issues. 

Although approximately $150,000.00 to $200,000.00 has been spent in this area in the last six years, most of these costs occurred prior to the two major settlement agreements occurring with the developers described above.  These settlement agreements resolved over 35 years of development issues and have allowed all parties to move forward without incurring extensive additional legal expenses in research and dispute, and instead focus on planning for improvements for Heritage Ranch in a cooperative spirit.   The recent Main Marina upgrade and the North Gatehouse along with opening of Heritage Loop Road are examples of that.

2.  Document Upgrades:  In 2003 the Board of Directors paid approximately $10,000.00 for an employee manual re-write.  During the last two years, the Board of Directors has spent approximately $25,000.00 in reviewing our security policies and working at adopting an updated Rules and Regulations booklet including training provisions.  This project is still on-going.

3.  There was an on-going dispute between Nacimiento Lake Park (Waterworld) and HROA regarding a sublease which was negotiated and executed in 1999 for the Point property, which was to replace an existing sublease which was allowed to expired (for reasons unknown) without exercising the provided for extension[4].  Between 2004-2006 while Nacimiento Lake Park (Waterworld) was still in control of the leasing rights to the Point property approximately $15,000.00 was spent defending HROA’s rights to access that property based on various threats, a 3-day notice to vacate and a 30-day notice to vacate.  HROA is presently negotiating with Monterey County directly regarding future use of the Point property, since the original lessee is no longer involved.

4.  In 2004-2005 HROA defended themselves in a meal-break dispute after receiving an audit dating back to 2001[5].  Approximately $5,000.00 in legal bills were spent on this matter and approximately $4,000.00 in penalties were paid.

5.  In 2006 Heritage Ranch Sales, which was doing business at Lot 15 of the 20 acres, threatened HROA with various legal issues related to their purported rights to operate a sales office at this location[6].  The owner, Brock, eventually terminated the lease with Heritage Ranch Sales.  Approximately $10,000.00 was spent by HROA on this matter.

6.  In 2007 a tenant filed complaints to the Federal Government regarding discrimination[7].  To date, HROA has spent approximately $25,000.00 in legal bills defending those various claims, which have since expired.

7.  In 2007 the HROA Board of Directors entered into a lease agreement for cattle grazing on certain open space parcels with David Weyrich.  Cattle escaped and personal damages occurred to property, including two vehicular accidents.  David Weyrich and HROA ended up in a dispute on this issue, which resulted in David Weyrich tendering a claim to his own insurance carrier.  HROA spent approximately $5,000.00 on this matter.

Regarding our insurance premiums, other than the “Ellison v. HROA” case and the “Peterson v. HROA” case mentioned above, no litigation claim made by HROA, or against HROA, has been tendered to any HROA insurance carrier by HROA in the last six years and there has been no significant impact on our insurance premiums associated with any litigation.  Our D&O Policy premium was approximately $5,000.00 / year five years ago, and is presently $6,800.00 / year.  There was a change to the deductible in 2003 from $10,000.00 to $50,000.00 which was due to the dropping of D&O Coverage by many insurance companies at that time.  All insurance disclosures are reported annually in an annual mailing. 

I believe this should answer all questions and formally put this matter to rest.

Linda Richey

General Manager