No board member wants to see their name, or that of their Association, listed as a defendant in a lawsuit alleging they violated their obligations under the Association’s CC&Rs or California law. This is especially true for any board member who spends countless hours enforcing the governing documents, participating in violation hearings, attending board meetings, and communicating with homeowners regarding issues at their Association. Not to mention that these hours are spent as unpaid volunteers. While the stress of litigation may not be avoided, California law provides individual directors and boards with defenses to support their diligent, good faith, and reasonable decisions. These defenses are known as the “business judgment rule” and “judicial deference.”
Individual Board Members Can Be Protected Under The Business Judgment Rule
Under the business judgment rule, a board member who performs their duties in good faith, in a manner they believe to be in the best interests of the Association, and with such care as a similarly situated person, is not liable for any alleged failure to discharge their obligations as a board member. (Corporations Code § 7231.) Additionally, in reaching their decisions, a board member may rely on reports, opinions, statements, or other information provided by: (1) other officers or employees of the Association the board member believes is reliable and competent on the matter, (2) the board’s attorneys, accountants or other individuals with professional or expert competence on the matter, or (3) a committee that the board member does not serve on and is composed of competent, reliable, and/or professional individuals.
However, the fact that a board made a decision does not necessarily invoke the protections of the business judgment rule. First, the decision has to be within the board’s authority under to the Association’s governing documents or California law. Second, a board member cannot simply ignore a problem hoping to use the business judgment rule as a defense. As noted by the California Court of Appeal in Palm Springs Villas II Homeowners Assn., Inc. v. Parth (2016) 248 Cal.App.4th 268, 280, “whether a director exercised reasonable diligence is one of the ‘factual prerequisites’ to application of the business judgment rule.” Third, if a board member has special expertise (i.e. lawyer, accountant, contractor, etc.), they may be held to a higher standard than a board member without that expertise.
Courts Will Generally Defer To A Board’s Discretionary Decisions
In the last twenty years, California courts have established a rule of judicial deference to discretionary decisions made by the Association’s board members. In order to receive the protections afforded under this rule, the board must perform a reasonable investigation and act in good faith and with the best interests of the community in mind. The decision must also be within the authority of the board as established by the Association’s governing documents, California law, and comply with public policy. These decisions cannot be arbitrary or capricious and must be applied fairly and uniformly.
Initially, the rule of judicial deference only applied to board decisions regarding maintenance and repair obligations. (Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249.) However, some California Courts have expanded the application of the rule to other discretionary decisions including appropriate remedies for violations of the CC&Rs (Haley v. Casa Del Rey Homeowners Assn. (2007) 153 Cal.App.4th 863), designating proper storage spaces (Harvey v. The Landing Homeowners Assn. (2008) 162 Cal.App.4th 809), regulating short-term rentals (Watts v. Oak Shores Community Assn. (2015) 235 Cal.App.4th 466), approval of homeowner construction (Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965), and determinations of prohibited business uses (Eith v. Ketelhut (2018) 31Cal.App.5th 1). Expanding the rule to other discretionary decisions shows that California Courts understand that “[c]ommon interest developments are best operated by the board of directors, not the courts.” (Watts, supra, 235 Cal.App.4th at 473.)
How A Board And Individual Members Can Avoid Losing These Defenses
As every board member knows, complying with their Association’s governing documents and California law are the first step in avoiding litigation. To achieve this goal, board members must be able to rely upon competent advice from their general counsel, property managers, and licensed vendors. Failing to diligently request the necessary information from these competent professional sources before making decisions can lead to liability for either the individual board member or the Association.
In addition to seeking competent advice and information, boards can also proactively address homeowner complaints before they turn into lawsuits. Performing investigations into these complaints allows a board the opportunity to detect the cause of problems, identify potential solutions, and develop evidence to support a reasoned decision. Actively investigating complaints can also counter any allegations that homeowner complaints were ignored.
Similarly, documenting steps taken by the board during the decision-making process creates evidence that can be used to establish that the Association and individual board member actions were done in good faith, are fair, and uniformly applied. These steps can include receiving constructions bids, taking complete minutes of board meetings, providing homeowner notices, and other paper or electronic records. Without this supporting evidence, a court may be less likely to find in favor of the Association.
Lastly, it is important to remember that these are only defenses and lawsuits cannot always be avoided. An Association needs to have adequate insurance to provide protection in the event that litigation is commenced. If certain recommended minimum insurance coverage is obtained by the Association for both general liability of the Association and for individual board members, the board members “shall not be personally liable in excess of the coverage of the insurance.” (Civil Code § 5800.)
When applying the business judgment rule or judicial deference, California courts do not require that a board’s decision be perfect or even correct. Courts are merely asking boards to comply with their governing documents and California law, with their Association’s best interests in mind, and applying those decisions in a fair and uniform manner. During its decision-making process, it is important for a board to consult with its general counsel, property managers, and licensed vendors in order to ensure that a reasoned decision can be reached.
John F. Baumgardner is an attorney with Chapman & Intrieri, LLP in their Roseville, California office. His practice focuses on representing Homeowners Associations in construction defect disputes, judicial collections, general counsel matters, general civil litigation, and revision of governing documents.