New Law AB 240 Affecting California Mutual Water Companies

The California Legislature has once again adopted new requirements for mutual water companies, this time in Assembly Bill 240, which was signed by Governor Brown on October 8, 2013 and will become effective January 1, 2014.

Mutual Water Company Open Meeting Act

Most significantly, AB 240 establishes a new Mutual Water Company Open Meeting Act, to be codified in Corporations Code §§ 14305-14307. The Act applies to mutual water companies many of the requirements for open meetings and records that were previously applicable to homeowner associations under the Davis-Stirling Act. It applies only to mutual water companies that operate a public water system serving 15 or more customer connections.

Under the Act, a mutual water company board of directors must provide notice of a meeting to the members at least four days in advance, including the agenda. Any eligible person may attend a board meeting, including a teleconference meeting, upon providing 24 hours advance written notice. For this purpose, an “eligible person” means a member of the company, an occupant of a property served by the company, or an elected official of a city or county that represents persons that receive water service from the company. At a meeting, the board may not take action on any matter not on the agenda and must allow any eligible person to speak, although the board may adopt a reasonable time limit.

There are provisions allowing for emergency meetings with limited or no notice to the members, under certain circumstances. In addition, meetings may be closed for executive sessions related to litigation, formation of contracts with third parties, member discipline, personnel matters or to meet with a member regarding payment of assessments. Any matter discussed in an executive session must be noted in the minutes of the open meeting. Within 30 days of a meeting, the minutes or draft minutes must be made available to an eligible person who requests a copy and pays the company for its expenses to provide the minutes.

The board of a mutual must adopt an annual budget prior to the start of each fiscal year. The board must contract with a certified public accountant or public accountant to conduct an annual review of the financial records and reports of the company, subject to generally accepted accounting standards. Eligible persons may request a copy of the budget and financial report.

If an eligible person believes a mutual water company has violated the Act, they may file a demand with the company to cure the defect within 90 days of the alleged violation. The company must respond within 30 days, and if the eligible person does not accept the board’s response, within 15 days they may file a complaint in superior court seeking a determination that the board’s action is null and void. An eligible person who prevails in a civil action will be entitled to recover attorney fees, but a prevailing mutual water company is not entitled to costs, unless the action is found to have been frivolous, unreasonable or without foundation.

The Act will impose new costs on mutual water companies and increase the likelihood of litigation by members. In order to prepare companies for these new requirements, Brownstein will describe the Act and AB 240 in detail as part of the board member training described below.

New Powers Regarding Assessments, Rates and Charges

Collection of rates, charges and assessments from members can be challenging for a mutual water company. For small water systems, the financial impact of having a member become delinquent may be especially significant. Thus, it is important for a mutual to have a robust and clear procedure for collecting delinquent fees.

Under previously existing Corporations Code § 14303, a mutual has the statutory authority to suspend water service or cause the forfeiture of the membership shares of a member who becomes delinquent in paying an assessment. A mutual should expand on that authority in its articles or bylaws to cover delinquent rates and charges and to establish a clear process with timelines.

AB 240 adopted new Corporations Code § 14304, which provides that a mutual water company may include a provision in its articles or bylaws allowing the company to record a notice of lien against the real property of a member to secure the collection of rates, charges and assessments owed to the company by the member based on provision of water service to the property. The provision requires the company to give at least 20 days prior written notice to the member. The act does not include a mandatory process for releasing the lien, but a mutual should include such a process in its articles or bylaws.

The Maywood Mutual Water Companies

AB 240 was sponsored by Assemblyman Anthony Rendon (D-Lakewood) in response to alleged water quality problems at three mutual water companies in the City of Maywood in Los Angeles County. The act included a statement of legislative intent in new Water Code § 10531.5 to encourage collaboration among the companies to create a public agency to consolidate and assume responsibility for drinking water services in the area. AB 240 included an appropriation of $7.5 million to the Water Replenishment District of Southern California to implement water quality projects in Maywood, but Governor Brown reduced that amount to $1 million. Reporting by the Los Angeles Times on the companies can be found here.

Board Member Training Required

AB 54 (2011) adopted a requirement that board members of mutual water companies complete a two-hour training on their duties as directors and the regulations applicable to mutuals. That statute made the training a one-time requirement, but AB 240 mandates training at least once every six years. Those directors who completed the training in 2012 will not need to repeat the training until 2018, but new directors will need to complete the training within six months of taking office.  As in 2012, Brownstein will be offering the required training by webinar on the following dates in 2013:

  • Wednesday, November 13, 2013 at 6:00 pm
  • Thursday, December 12, 2013 at 6:00 pm.

More information on the training can be found here.

New Coordination with Legislature

Brownstein has several clients who have expressed interest in more actively seeking to influence the laws regarding mutual water companies in future legislative sessions. This will include reacting to  legislation proposed by others and potentially seeking to introduce new laws that would be helpful to mutuals. If you are interested in joining or learning more about this coalition, please contact me.

45 Comments on “New Law AB 240 Affecting California Mutual Water Companies

  1. Mutual water company infrastructure has been grandfathered, is there any upgrades on any part of the system which would trigger/require complete compliance?

    • AB 240 does not include any changes to the requirements for water system infrastructure. As you state, AB 54, which applied the California Water Works Standards to mutual water companies, did require new infrastructure to comply with those standards while it grandfathered existing infrastructure. Unfortunately, there is no easy test for whether an upgrade requires broader compliance with the standards. An argument could be made that an upgrade may trigger compliance if the upgrade is for one component of an integrated infrastructure system, but I would not apply that logic very widely. The intent of AB 54 was clearly not to require mutual companies to replace previously existing infrastructure unless it was going to be replaced regardless of AB 54. Thus, I would apply the standards to any upgrades narrowly.

  2. Thanks for your very informative post on AB 240. I have a quick question. Where you say:

    “A mutual should expand on that authority in its articles or bylaws to cover delinquent rates and charges and to establish a clear process with timelines.”

    I take you to be saying that the actual amounts should be included in our bylaws. Is this correct? Should we be updating our bylaws every time we make an adjustment to our late fee schedule, for example?

    • I would not put your actual schedule of rates and charges in the bylaws, no. I was referring to the process by which the mutual will collect rates and charges from its members. Such a policy would identify at what point past due rates and charges become delinquent, and what actions the company may take upon delinquency. For example, at what day of delinquency will the company suspend water service, and what kind of notice and opportunity to be heard will the company give the member? Having a clear process and applying it uniformly to all members goes a long way toward avoiding disputes about particular delinquencies.

  3. Can public agencies such as cities, schools control shares? If not, are those shares merely unregistered…

    If parcels have been subdivided how does the share get divided, or can the share be assigned to one and not the other parcel? Or can the company create new shares?

    • Public agencies can own membership shares in a mutual water company, but state law also provides for the temporary cancellation of shares associated with lands owned by the state or local public agencies. Either approach can work.

      A mutual’s bylaws should contain rules on the issuance of new shares to deal with subdivision of lands. Fractional membership shares are not allowed, and shares should be issues on some logical basis, e.g., one share per lot, but the rules can be tailored to the specific circumstances facing the company.

  4. Is there a database or somewhere you can check on whether board training as been completed by current board members? What penalty is there if training is not undertaken?

    • No, there is no centralized database of the training, although each company should keep a record of the training for their board members. For the training I have done, I have issued a certificate of completion with the date attended. AB 54 does not provide for any penalties, and it is unknown exactly what the consequences would be of failing to complete the training. I have not yet seen the Department of Public Health or other authorities attempt to enforce the requirement, although I do know that they are aware of it.

  5. Discussion of delinquent bills amounts to at least half of what we talk about at our board meetings. I’m wondering how the new open meetings rules affect that. Should we – can we – discuss these matters in a closed executive session? Do we have to mention a particular account in the agenda in order to discuss it at our meeting? And what are our obligations to disclose delinquent accounts in our minutes? Perhaps we can disclose these by account number and not include a shareholder’s name. I am concerned for the privacy of our delinquent shareholders here.

    Thanks!

    • I think your ideas about how to handle are correct. I would recommend discussion of particular delinquent accounts in executive session, with an agenda item simply called “Discussion of Delinquent Accounts.” After the executive session, you can report to any attendees and in the minutes that you discussed X number of delinquent accounts with total delinquencies of Y dollars. That will record the discussion for purposes of the Mutual Water Company Open Meeting Law, but protect individual members’ information. A delinquent member would be entitled to attend the portion of the executive session that applies to them.

  6. I live in a neighborhood of 20 homes that share the same well. We are the only shareholders of our water company. I would consider us a private water company. Does this new law apply to us? What is the definition of a mutual water company? Thank you

    • A mutual water company is a private corporation that delivers water to its members/shareholders. According to your description, yes, your company is most likely a mutual water company within the scope of AB 240.

  7. In previous years our company decided to mail out proxy letters in Spanish; a different opinion is that these letters have to be mailed out in five different languages. What is the legal opinion in the state of California which has made a final ruling on this issue?

    • AB 240 does not include any requirement of notices being provided in different languages. If a mutual water company wants to make its materials more accessible to its members, it may send out communications in Spanish or other languages, but it is not required to do so. Such a practice is within the discretion of the board of directors.

  8. The Mutual Water Co in my HOA is run by the largest vineyard owner in our association. He is draining our drinking water to unsafe levels so he can flood his drought stricken fields, whereby there is insufficient water levels by morning for all homes to utilize the water regularly. We have been asked not to water our yards until noon. How can the homeowners stop the draining of our tank? I fear there will not be enough water to our hydrants in case of an early morning fire. CC&R’s state this vineyard can have it’s non-conforming use of the land revoked. How can I, as a homeowner, stop the vineyard from stealing all of our water?

    • My HOA just rebuilt the mutual water company infrastructure and now it does not work properly. The pumps shut down several times a day, requiring a homeowner to reset them. $120,000 was spent and now the water director will not disclose why the problem and what the solution will be. What can I do? I am being accused of spreading malicious rumors for asking about the problem, even though all I did was ask the board about our problem. I am being bullied into silence by the president of the HOA in defense of the water director..

    • I can understand your frustration at the situation you describe. You should keep in mind, though, that the company leaders are most likely regular folks who are not professional engineers and are just as frustrated (and embarassed) about the situation as you are. I recommend being gentle with them, with a tone of “how can we help,” rather than “how did you screw this up?” Of course, some mutual water company leaders in these sitautions will be overly sensitive or concerned about their power. It takes a deft touch to handle such personalities successfully. I always recommend being calm and friendly, yet firm about the issues that need to be resolved. I hope that helps.

    • Without addressing your particular scenario, I would say that a mutual has an obligation to distribute water among its members on a fair and equitable basis. A mutual may have allocation rules in its bylaws, or the board of directors may adopt rules and regulations that establish what is reasonable under the circumstances facing the company. There are many different rules that might be fair in varying contexts, so it’s impossible to say what is the right allocation method everywhere. Each member of a mutual should have the ability to petition the board or, if necessary, the whole membership, to establish and enforce allocation rules.

      From a practical standpoint, I think it is important when addressing situations like this to remember that mutuals are essentially groups of neighbors working together. That means it is almost always more successful to be calm and friendly, rather than angry or demanding in tone. That does not mean that you should not be firm and clear, which are also critical, but the tone is very important. Good luck in resolving your issues.

  9. A church’s members want to serve on the board of our mutual water company, are all church members considered owners? Isn’t the church a corporation, a legal person, and who would be the person to represent the church? Equally, parcels are owned by the city, can anybody in the city serve on the board of directors of our mutual water company?

    • I don’t know all the facts, but it sounds like the church corporation would be the member of the mutual water company, not the individual church members. The church’s board of directors or other governing body could delegate a person to vote or otherwise act for the corporation. The mutual would be acting reasonably to ask a person who purports to be the church’s representative to provide a corporate resolution substantiating their claim, especially if more than one person is making such a claim.

      If a public agency acquires lands within the service area of a mutual, the best practice is for the mutual to cancel the membership appurtenant to those lands, pursuant to Corporations Code section 14300(a). The mutual may deliver water to the public agency even without it holding a membership. If the agency disposes of the property at some point in the future, the mutual should reissue the cancelled membership to the new (non-agency) owner.

  10. Question about this sentence, “It applies only to mutual water companies that operate a public water system serving 15 or more customer connections.” Does this statement apply to private mutual water companies that only serve water to their residents?

    • Yes, it does. Private mutual water companies are the direct target of AB 240. But those companies must be organized as corporations under California law and serve at least 15 service connections.

  11. Slightly off this subject……….Can Board of Directors members receive compensation like free water and free assessments?

    • There are no state laws regarding compensation of mutual water company directors, so it is up to each company to decide that for itself. I would recommend that, if a company wants to pay some compensation for directors’ service, it do so on a basis other than free water or assessments. For example, a company could pay an annual amount or a certain amount per meeting.

      Of course, there are a number of concerns with corporate director compensation. For example, the Deloitte Center for Corporate Governance has published research on compensation of directors in publicly traded companies.

    • Are the board members of the Mutual Water Company required to disclose compensation to directors or is this only decided by board members? What about if the Mutual is not incorporated? Can different members be charged different water rates without their knowing it?

    • Thanks for the questions. I always find such questions fascinating, because they demonstrate the range of practice among companies.

      I will go through these each separately.

      (1) There is no special rule regarding disclosure of compensation to directors. There are such rules for publicly traded corporations, but not small companies like mutuals. A company’s bylaws could provide for such disclosure, but that would be on a company-by-company basis. I would not recommend that a board approve compensation for itself unless there is express authorization in the bylaws or a vote of the members.

      (2) Unincorporated mutuals can be difficult to govern as a general matter, because they have no clear governance rules established in articles or bylaws, and they do not qualify for many of the statutory rules. There is some protection for unincorporated associations under state law, but I recommend that mutuals incorporate if possible.

      (3) One of the basic principles of utility management is that they may not discriminate between similar customers. Of course, there can be debates about what “similar” means, but the principle stands. While a mutual is not subject to the public utility laws, it should follow the non-discrimination principle. Best practice would be for a mutual to adopt assessments, rates and charges that are provided to all the members. In addition, new AB 240 requires the preparation of an annual budget, which must be provided to a member upon request. That should prevent the adoption or application of “secret rates.”

  12. Hi Wes, can board members talk about anything other than at a meeting? What functions of the company can occur without a meeting, ie repairs, removal of damaged equipment?

    • Under AB 240, a board may not take any action other than at a meeting, and boards are specifically prohibited from doing business by email. However, that would not stop the company manager or a board committee that does not include a majority of the directors from taking action, including repairs or similar actions. The law is intended to require open meetings on policy decisions by the board, not for physical actions taken by company managers or operators.

  13. Hi Wes,

    what happens to a mutual water company if all board members resign?

    what government entity gets involved and how is the company compelled to comply with the law?

    context is no one wants to be on the board due to perceived litigation threat from shareholder.

    • Oversight of a mutual water company would be first by the California Department of Public Health, and if necessary, the California Attorney General might step in. Of course, it would be better to avoid either of those interventions happening. You should note that, if organized correctly, board members of a mutual would be protected from any personal liability due to their service as directors.

  14. For a Board of 3 which are also officers of a Mutual Water Company Corporation, can two or three of these people acting as officers and not board members meet, without noticing the shareholders, to carry out their officer duties without being in violation of AB240?

    • The Mutual Water Company Open Meeting Act defines a meeting as “a congregation of a majority of members of the board at the same time and place to hear, discuss, or deliberate upon any item of business that is within the authority of the board.” If a board has three members, a majority would be either two or three of them. As you point out, that would be difficult to apply to daily management of the company, since many daily decisions may be made by two board members. The key language is that a meeting only involves an “item of business that is within the authority of the board.” Therefore, if an action has been delegated to one or more board members as officers or a board committee, they should be able to meet without triggering the open meeting rules. A board should be careful to delegate its authority during a meeting, however, possibly through a resolution that establishes the powers and duties of each officer.

  15. According to AB240 all mutual water companies that operate a public water system must conform to the requirements of having an annual review of their financial records and reports. I’ve been told that MWC’s serving less than 100 shareholders does not have to comply with this requirement (based on other corporate laws) is this true?

    • No, I do not think that is correct. There is a general rule of interpretation that says more specific provisions govern more general provisions. Since AB 240 governs mutual water companies specifically, I do not think any other corporate rule would trump or limit its provisions.

  16. Section 14304 allows MWC’s to lien the property of a delinquent member. Does this mean any real property of the delinquent member, or only the property attached to the MWC? As worded the statute does not specify. Our water company has a long time delinquent member, and if we can lien the member’s other real property, we will do that. (We need to amend our bylaws first.)

    • You are correct that the statutory language is unclear on this issue. There are three potential interpretations: (1) only the property for which the member is delinquent; (2) any property to which membership shares are appurtenant, whether or not each of those shares is appurtenant; or (3) any property owned by the member wherever it may exist, and whether or not it has any appurtenant shares. My preliminary opinion (I might be swayed otherwise in the future) is that the best interpretation is (2) above. That seems most fair to both the company and the member.

    • This reply responds to your comments regarding assessment liens–what property they attach to. My thought is the assessment lien should attach to any real property the member owns, because that way the lien becomes more of a hammer to get the outstanding assessments paid. I cannot find any legislative comment on this statute yet.

    • I understand your argument and desire to have leverage against a delinquent member. There is no statutory language that would definitively say your approach is wrong. From a practical standpoint, however, and as an attorney who generally represents mutual water companies and not members, my judgment is that such a strategy may go too far. For example, could a mutual water company in San Diego County seek to file a lien on a delinquent member’s property in Modoc County? It is possible that a court would uphold such a lien under the statutory language (and I could argue for it in the right circumstances), but I suspect a company would have a hard time convincing the county recorder to record a cross-county lien, and a court would limit the application to properties to which a membership share is appurtenant.

  17. Please clarify AB 240 Section 2 regarding “eligible person” attendance at meetings of the Board of Directors.

    Does Section 14305 (b) added to the Corporations Code mean a Mutual Water Company can deny an eligible person attendance at a Board of Directors meeting if the eligible person gives the Board of Directors less than 24 hours advance written notice?

    In other words, does the “Mutual Water Company Open Meetings Act” mean attendance by a shareholder at a Board of Directors meeting is not guaranteed without the shareholder first giving the Board a minimum of 24 hours written notice of their intent to attend the meeting?

    • You are correct in your interpretation. AB 240 requires that an eligible person who wants to attend a board of directors meeting provide 24 hours advance written notice. If they fail to do so, the board may deny them access to the meeting. This is supposed to allow a board to make arrangements for eligible persons to attend. For example, a board may meet in one director’s home, and it could be unreasonable to compel access by a large number of eligible persons in that venue. If 24 hours notice is given, then the board has an opportunity to find another meeting location, or may postpone the meeting.

      I would generally recommend that a board adopt a policy of how it will apply the Open Meeting Act, and do so in a consistent manner. If a board chooses to apply the 24-hour rule strictly, it may do so, and should apply that policy evenly to all eligible persons, absent special circumstances.

  18. I understand that under AB240 bylaws can be changed without the agreement of a majority of the members of the MWC? How many members must approve new bylaws or can it be done with just Board Members? This would be to include information about liens, overdue payments, use of water for purposes rather than just domestic purposes and other issues with which we have problems.We do not have meters.

    • AB 240 did not change the laws regarding adoption or amendment of bylaws. Those laws are found in the normal corporate governance sections in the California Corporations Code, specifically section 7150 for non-profit mutual benefit corporations and sections 211-212 for a general stock corporation. In the case of a mutual benefit corporation, the board of directors may adopt and amend the bylaws unless the articles or bylaws restrict that power, or the change would materially and adversely affect a narrow set of the rights of members, e.g., in voting or the elimination of members. In the case of a general stock corporation, the board of directors can generally adopt and amend bylaws unless the articles or bylaws restrict that ability.

      So I could not answer your question on a broad basis, since it depends on your company’s existing articles and bylaws. In the set of model bylaws that I use for my client companies, the bylaws may be adopted or amended by either the board of directors (with some exceptions) or a majority of the members.

      If you are going to update your bylaws for other purposes, I recommend that you also use the opportunity to update for the latest laws, like AB 240. Feel free to contact me for assistance with that process.

  19. When does the reviewed F/S rquirement become affective? If our year end is 6/30/14, do we have to have a review for the 6/30/14 year end? or can we wait until the following year.

    • The law became effective January 1, 2014, but is silent on that issue. I think you could make a reasonable argument that your company would need to adopt a budget under Corporations Code section 14306(a) for the fiscal year starting July 1, 2014, and that your first annual review under section 14306(b) would be of that same fiscal year.

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