Although the Business Judgment Rule offers fairly robust protection for an association’s directors, it does have its limits. A recent example can be seen in the court’s ruling in the case of Palm Springs Villas v. Parth ((2016) 248
Cal.App4th 268). In Parth, a director unilaterally authorized multiple third party actions that exceeded the scope of her authority. Tis director entered into various contracts, without ever consulting with her board, and signed almost two million dollars’ worth of promissory notes that were secured by the association’s assets, without consult- ing the association’s other homeowners. In each case, this director admitted that she never reviewed her association’s governing documents to see what these documents said with regard to her authority to enter into contracts or take out loans for the as-
sociation. Foreseeably, the association sued this director under a breach of fiduciary duty claim. According to the court, the director’s failure to review her own governing documents and confirm the scope of her authority amounted to “willful igno- rance” and created an issue of material fact as to whether the director acted with reasonable diligence entitling her to protec- tion under the Business Judgment Rule.
In addition to the Business Judgment Rule, Civil Code § 5800 provides that a volunteer director will not be held per- sonally liable for any action that results in damages to the association or its members in excess of the association’s in-
surance coverage if: (1) the association maintains directors and officers (“D&O”) liability insurance coverage in mini- mum amounts of $500,000 for an association with 100 or less separate interests or $1,000,000 for an association with more than 100 separate interests; and (2) the director’s act or omission was performed within the scope of the director’s duties, in good faith and was not willful, wanton or grossly negligent. As you can see, failing to act in good faith could expose a director to personal liability in any amount that exceeds the Association’s D&O insurance coverage.
In conclusion, a board of directors is legally obligated to manage its association, and “steer the bus” for the benefit of its members. At the same time, the law recognizes that a board is composed of volunteers and no board is perfect. Together, the Business Judgment Rule and Civil Code § 5800 form a critical safety net for directors and shields their decisions, as long as certain minimum standards, as briefly mentioned above, are met. Fasten your seat belt as you may be in for a bumpy ride!
SANDRA L. GOTTLIEB, ESQ. is one of California’s leading community association attorneys and a founding partner of SwedelsonGottlieb, which limits its practice to the representation of California homeowner associa- tions, including condominiums, planned developments
DUTY OF MAINTENANCE – Te board is responsible for the maintenance, repair and replacement of the asso-
ciation’s common area components, so the board should be aware of any actual or potential maintenance issues as well as the association’s plan in addressing any deferred maintenance items. Te association’s reserve study is a helpful tool for iden- tifying deferred maintenance items and the estimated cost for addressing these items.
DUTY OF OPERATION – Te board is responsible for the operation and management of the common area facilities
and amenities, such as pools and clubhouses. Te board is also responsible for contracting and paying for services for the association (e.g. janitorial services, landscaping, utilities).
DUTY OF ENFORCEMENT – Te board is responsible for enforcing the association’s governing documents, which
includes the enforcement of use restrictions, delinquent assessment collection, and architectural restrictions. In all cases, enforcement must be reasonable, consistent, and uniform, subject to approved variances within the board’s authority.
and cooperatives. Sandra practiced law for over 35 years. Sandra has lived in two condominium associations, including a master and sub-association, and a Planned Development. Sandra’s extensive negotiating skill acquired in the early years of her practice has given her the ability to work with volunteer board members, associations› managing agents and opposing counsel to achieve in- tended results, and to provide sound counsel regarding Association operational issues. Sandra’s experience in representing California community associations allows her not only to provide legal representation but also counsel on the many different matters and issues that impact California homeowner associations.
JOSEPH GILLMAN is an Associate Attorney at Swe- delsonGottlieb and focuses his practice on all aspects of homeowner association representation. Joseph assists associations on a wide range of matters, including op- erational issues, corporate governance, interpretation of governing documents, corporate matters, dispute reso-
lution, and general transactional matters. Prior to joining the firm, Joseph co- founded a start-up company. Tere, he managed the company’s legal needs and advised on all aspects of its business strategy. Joseph earned his undergraduate degree from the University of California, Berkeley, and his law degree from the Emory University School of Law. During law school, he earned a joint, JD/ MBA degree and served on the editorial boards of the Emory International Law Review and the Emory Corporate Governance and Accountability Review. Joseph is licensed to practice law in California and New York.
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