Most California homeowners associations (Community Associations) are mutual benefit corporations. As such, the business affairs of the corporation and all corporate powers are to be conducted and exercised by and under the direction of the duly elected (or appointed, if applicable) Board of Directors. This principle applies to mutual benefit corporations in California, as identified in Corporations Code § 7210.
Members of a Board of Directors of a Homeowners Association have a “Fiduciary” duty to their members. A “fiduciary” is one who stands in a special relationship of trust and confidence with respect to his or her obligations to others. One who manages the property and/or affairs of another is a fiduciary and is subject to a high standard of care, similar to that of a trustee.
A “fiduciary” should act in good faith and exercise the basic duties of good management. “Good faith” is generally said to be that state of mind denoting honesty of purpose, freedom from intention to defraud and, generally, faithfulness to one’s duty or obligation. “Good Management” includes, for example, keeping adequate books, records, and minutes, and in the event a management firm is utilized, hiring a company with the right combination of education, skill, resources, and insurance to properly execute the agreed duties.
Board members elected to serve on behalf of a community association are expected to exercise their independent judgment, in deliberation with other Board members, to address the association’s business. This does not mean that all directors will always agree, or will even “like” each other. But, they need to work cooperatively for the benefit of the Association, in the Association’s best interest. When the majority of the Board has made a decision, the Board should speak with one voice to implement that decision.
Board members are bound to follow two primary duties; (1) put the interests of the Association above the personal interest of the director and (2) always exercise prudent business judgment (Corp. Code § 7231). Section 7231(a) states:
A director shall perform the duties of the director, including the duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (emphasis added).
This section of the Corporations Code is also known as the Prudent Business Judgment Rule.
Directors have the ultimate responsibility for the operation of the Association. A director or Board may lawfully delegate certain functions or actions of corporate management to an officer, committee, managing agent, or other appropriate person/party, but the ultimate responsibility for management of the association still rests with the Board. This does not mean that the law expects all Board decisions to be perfect or right – mistakes can be made. As long as the decisions made comply with the business judgment rule, directors will not have liability for an alleged failure to discharge duties as a director. Corporations Code § 7231.5 addresses the Liability of Volunteer Director or Officer – Failure to Discharge Duties. Notice the key word “Volunteer” – the broad indemnification and protection offered directors under this section of the Corp. code only applies to volunteer directors.
A Quick Checklist for Preventing Director Liability
Based on Your Decision-Making
- Consult and Rely on Experts
- Do not vote on a matter when you believe that it possibly involves a conflict of interest.
- Know and follow the rules and laws governing your Association.
- Maintain adequate general liability insurance for the Association and Directors’ and Officers’ Liability Insurance.
- Be attentive to corporate matters.
- Ensure compliance with all statutory duties imposed on the Association.
- Investigate independent contractors and employees before engaging their services.
- ALWAYS act in the best interest of the Association.