Q&A: Joining a board of directors entails serious legal responsibilities
QUESTION: I am dissatisfied with the performance of our board of directors and am considering running for a spot myself, but I’d like to know what I am getting myself into. I talked to one of the board members about his duties, and he told me that they are clearly laid out in Civil Code section 5500.
The code section says that the board on a quarterly basis must complete several tasks, including reviewing the association’s bank statements, reconciling the operating and reserve accounts, and comparing the year’s reserve revenues and expenses to the budgeted amounts.
He said that is their only statutory duties, but that doesn’t ring true to me. I am especially concerned about any personal liability I may be taking on in becoming a director.
ANSWER: It is true that section 5500 outlines the duties of the board, but the board’s statutory responsibilities don’t end there. There’s more, starting with Title 10, California Code of Regulations section 2792.21(a). Aside from holding elections and ensuring common areas are maintained, it enumerates other board duties, including:
Enforcing provisions of the covenants, conditions and restrictions, articles and bylaws. Paying common area taxes and assessments. Contracting for goods and services for the common areas and facilities. Purchasing casualty, liability and other insurance on behalf of the association. Formulating rules of operation of the common areas and facilities. Initiating and executing disciplinary proceedings against association members for governing document violations.
Board responsibilities also are not limited to statutory duties. As fiduciaries, members have a general and overarching duty to act in the best interests of the association — even if this means acting at the expense of their own interests.
Courts recognize this is a burden and refrain from reviewing a director’s impartial decisions or second-guessing actions that were performed in good faith, even if those decisions or actions were ultimately wrong.
This is called the “business judgment rule,” and is codified by Corporations Code section 7231. It says that as long as directors perform duties in good faith using the same level of care as an ordinarily prudent person in a like position under similar circumstances they shall have no liability for their decisions.
However, the rule does not immunize a director from liability and deference when acting negligently. In Palm Springs Villas II Homeowners Assn. vs. Erna Parth, the state Court of Appeals last year decided that the board president failed to understand the scope of her authority and made no effort to ascertain what authority she did possess. They said “the business judgment rule would not extend to such willful ignorance” and did not bar a claim for breach of fiduciary duty.
Another case, Huntington Continental Town House Assn. vs. Joseph Miner, directors foreclosed on a titleholder’s unit due to a delinquent assessment lien of $6,418. Even though the owner kept tendering payments, his checks were returned because association attorneys claimed they were “unable to accept partial payments.” The court said in a 2014 ruling that the homeowners association must accept an owner’s partial payment and apply it as prescribed by statute.
In Wittenberg vs. Beachwalk Homeowners Assn., the board’s policy did not permit homeowners to publish advocacy pieces in the association’s newsletter, website or bulletin board despite a legal obligation to ensure access to common-area forums during an election. The 2013 court case cost the HOA hundreds of thousands of dollars in legal fees.
In the latter two cases, board directors were not held personally liable, but the judgments certainly drove home that directors are in for a shock if they only follow the civil code in carrying out their duties.
Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 ornoexit@mindspring.com
