A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (Corp. Code § 7231(a)).
Where this standard is satisfied, a board and its directors will be shielded from legal liability. In the context of a homeowners as- sociation, the seminal case on this issue comes from a California Supreme Court decision in Lamden v. La Jolla Shores Clubdo- minium Homeowners Association ((1999) 21 Cal.4th 249). In Lamden, the court held that it would defer to a board’s author- ity and presumed expertise in discretionary decisions regarding the maintenance and repair of a common interest development, provided the board’s decisions were (1) based upon reasonable investigation, (2) made in good faith and with regard to the best interests of the association and its members, and (3) within the scope of the board’s authority as provided by the association’s governing documents and applicable law. Let’s delve a little more deeply into how a board can meet this standard.
Board decisions are based upon reasonable investigation where that board investigates and evaluates the facts relevant to a situ- ation before making a conscious decision to act (or not to act). Te law allows directors to rely on information, opinions, re- ports and statements that are prepared by experts and consul- tants within the realm of their expertise (Corp. Code § 7231). So, when in doubt, a board should solicit the advice of the as- sociation’s experts and consultants (e.g. legal counsel, financial manager, reserve study provider, managing agent).
A board acts in good faith and with regard to the best interests of the association and its members where that board’s decisions are intended to benefit the association as a whole. Tis means that a director’s decision should not be intended to benefit his or her own self-interests, adversely affect the association’s le- gal or financial interest, or benefit a particular group within the association at the expense of the entire community. Tese issues can appear under seemingly innocuous circumstances. For example, an association needs to repair the community’s driveways, but the cost is so high that it must do the work in phases, with certain driveways being repaired before others. A director’s driveway is repaired during the first phase and an- other homeowner’s driveway is not. Was this decision made in good faith? Perhaps, depending on why the board selected that driveway for repair first (e.g., whether that driveway needed repair more urgently or was recommended for earlier repair by the association’s contractor). Tat said, if this were one of our clients, we would advise this particular director to recuse himself or herself from the vote on which driveway to repair first, to help protect the board’s decision against legal challenge and preserve the director’s protection under the Business Judg- ment Rule.
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Generally, a board’s duties and obligations require it to manage the association’s affairs. Oftentimes, an association’s governing docu- ments provide specific limitations on the board’s authority. Fur- ther, California law requires directors to act in a manner consistent with that of an ordinarily prudent person in a similar position. Tis means acting with the level of ordinary cautiousness that another person, facing the same situation, would use to minimize risks that can reasonably be avoided or minimized as well as avoid injury to themselves or others. Tis generally entails a conservative approach to management, with benchmarks set at basic common sense, prac- tical wisdom and informed judgment.
A board’s failure to abide by its obligations and duties can lead to a possible lawsuit under a breach of fiduciary duty claim. Some specific duties include the following:
THE DUTY OF KNOWLEDGE – Te board has a duty to enforce the association’s governing documents.
Tis means each director should know the contents and requirements of those governing documents (e.g. CC&Rs, Bylaws, Articles of Incorporation, operating rules, and ar- chitectural guidelines). Additionally, the board should be aware of the information in the association’s business re- cords, as this information is vital to discharging the obliga- tion to manage the association’s daily affairs.
DUTY OF FINANCIAL MANAGEMENT – Te board is responsible for managing the finances of the as-
sociation, which includes levying and collecting home- owner assessment payments. Tis requirement is so im- portant that statute requires a board to review the associa- tion’s financials no less than quarterly.
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