Q&A: Excluding a director from a meeting is a breach of fiduciary duty

Question: Our condominium board of directors intentionally excluded a director from attending a finance committee meeting, which she was entitled to attend. At the annual meeting, the president said it was done because the board was discussing personnel compensation. No such matters were discussed or on the table to be discussed. Personnel matters are always discussed in executive session after a duly noticed meeting where directors are present.

Against our covenants, conditions and restrictions, the board gives bonuses to all employees and vendors. Owners have not voted on these disbursements, and we want the money to go back to the owners who paid it to the association through our assessments. Are there negative implications for the board’s actions?

Answer: It is a breach of fiduciary duty to shut out any director from a board meeting. All directors have a fiduciary duty to competently represent the association, and they can do this only if they have the information they need regarding its governance.

The board is not in a position to give any money to third parties. The association is probably a nonprofit mutual benefit corporation with a tax-exempt status. Improper handling of association funds could jeopardize that status and have serious ramifications for the association and all its titleholders. If the board members want to give money away, they should pass the hat among themselves and donate their own money to whomever they choose. That way the association steers clear of improper actions and unwanted scrutiny.

When an association is a nonprofit mutual benefit corporation, its money belongs to the owners who paid it to the association through mandated assessments. That money must be properly managed.

The Internal Revenue Service has addressed the matter of how it views excess assessments when the owners hold a meeting each year on whether to return the extra.

Revenue Ruling 70-604 and Private Letter Ruling 61.00-00 allow a board, after receiving approval by its titleholders, to defer income to the next year with hope that its taxable income will be lower. The alternative to deferring income is to return excess income to the titleholders who paid it.

The IRS and most tax professionals believe that for the decision to be effective, it must be made by a vote of titleholders, not just the board. If conditions during the next tax year are unfavorable, the association will still end up having to pay taxes on income for both years.

Nothing in this code section gives the board a right to have a secret meeting for the purpose of giving money away under the guise of calling it a “bonus.” This mistake by the board could be costly, and one audit could bring down the association’s entire house of cards.

Every director has an absolute right to attend board and committee meetings. Shutting out another director from a duly convened committee meeting could also have serious consequences for all directors.

Although Civil Code section 5800 limits liability of association volunteer directors, it does not eliminate liability, and it is not a blanket immunity but rather a qualified immunity. Directors must perform their duties in good faith and cannot commit willful, wanton or grossly negligent acts. Giving bonuses using association funds are intentional acts.

Volunteer association directors shall not be personally liable in excess of insurance coverage specified in Civil Code section 5800 providing that they comply with the statute.

Irrespective of the statutory requirements, the association’s insurance carrier will have conditions and exclusions for coverage detailed in the policy with caution that it unequivocally reserves the right not to defend claims it considers to be outside its coverage.

Nothing in Civil Code section 5800 limits the liability of the association for its negligent acts or omissions, or for any negligent act or omission of a director.

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 or noexit@mindspring.com.