Court Defers to Boards in Decision-Making

Community associations throughout the state should take note of a little-publicized 1999 decision by the California Supreme Court.

The court’s opinion in the case of Lamden vs. La Jolla Shores Clubdominium Homeowners Assn. reinforces a standard, commonly known as the “business judgment rule,” that protects volunteer board members from liability for their actions.

That standard holds that board members should be able to show good reasons for their decisions and must act within the scope of the association’s governing documents and California law.

The board must also exercise its legal authority and responsibilities by acting in good faith, the standard holds, consulting professional advisors as appropriate, weighing the facts carefully and making decisions in the best interests of the association membership.

The case began when Gertrude Lamden, a condo owner, disagreed with the board of directors of the La Jolla Shores association.

The board decided to treat termite infestation only at the site rather than have the exterminator fumigate the entire structure.

Lamden sued the association, arguing that several previous spot treatments had not been successful. She sought a court order to require the tenting and fumigation of the entire building where her unit is located.

The trial court found that the board had acted properly and required Lamden to pay several thousand dollars of the association’s legal fees.

Lamden appealed the decision, and the appellate court found in her favor. The association then appealed to the state Supreme Court.

The association argued that the appellate court decision, if allowed to stand, would have set a precedent that might have placed board decisions in future lawsuits under the scrutiny of judges who might overturn decisions based on criteria other than the “business judgment” language in the state Corporations Code.

The La Jolla Shores board showed there were several factors leading to the decision to spot-treat the termite infestations rather than fumigate.

The board had considered the cost of total fumigation, inconvenience to residents and the risk to residents’ health.

The association board also felt that fumigation might not eliminate the termites because the wooded coastal area is fraught with the wood-destroying pests.

In addition, the board had approved a two-year exterior renovation project that would include the removal and replacement of any termite-damaged wood.

The state Supreme Court decided in favor of the association, upheld the standards of the “business judgment rule” and created a “deferential standard.”

Under the new deferential standard, courts will defer to a board’s decisions when those decisions are within the scope of authority granted in the association’s governing documents and the decisions are reached in a business-like manner.

The court stated that boards of directors are better equipped than judges “to make the detailed and peculiar economic decisions necessary in the maintenance of homeowners associations.”

New Law Targets Biased Language

Among the laws that took effect Jan. 1 is Senate Bill 1148, a strict new requirement about discriminatory language in the governing documents of any condominium, homeowner association, planned development, stock cooperative or community apartment project.

Typically, copies of the governing documents, including the articles of incorporation, the declaration of covenants, conditions and restrictions, the bylaws and the rules and regulations, are sent to a new owner when ownership changes.

Senate Bill 1148 requires that every association that distributes a governing document must attach a notice that any discriminatory language that might appear in the governing document is unenforceable.

Regardless of the content of the governing documents, a specific notice must be attached as a cover page. The notice must contain the following language typed in 20-point bold-faced red type:

“If this document contains any restriction based on race, color, religion, sex, familial status, marital status, disability, national origin or ancestry, that restriction violates state and federal fair-housing laws and is void. Any person holding an interest in this property may request that the county recorder remove the restrictive covenant language pursuant to subdivision (c) of Section 12956.1 of the Government Code.”

The new law requires that the board of directors take action to remove any discriminatory language within 30 days of receiving notification that discriminatory language exists in any of its governing documents.

The board is responsible for reviewing all of its governing documents and taking the necessary steps to remove any discriminatory language by Jan. 1, 2001.

Association boards of directors should hire attorneys to review all of their governing documents for offending language.

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Assembly Bill 1048 affects associations that have received funds because of a construction defect lawsuit and affirms the owners’ right to specific accounting information.

The new law requires disclosure of the amount of any funds received by the community association from legal settlements or court-ordered damage awards for construction or design deficiencies. The use of the funds must be disclosed in the annual financial review or audit sent to all owners.

Jan Hickenbottom is a community association management consultant and a founding director of the California Assn. of Community Managers. She selects questions of general interest and regrets that she cannot respond to all questions. Send questions to: Condo Q&A;, Private Mailbox 263, 4790 Irvine Blvd., No. 105, Irvine, CA 92620-1998.