HOA Director Conflict of Interest – How Might it Work Against a Director?
My last E-newsletter sent out just couple weeks ago was about Director Conflicts of Interest. I got some very positive responses to the E-newsletter, I will share a couple with you:
Very professional & to the point with excellent information. Just sad that many HOA & POA’s do not seek & follow sound advice, especially Directors with personal agendas.
Sure enjoy your newsletters.”
“I am writing only to say thank you for your timely and well written newsletters regarding HOA’s and the problems that are encountered. It is most reassuring to read how “our troubles” are not unique and how they can be resolved eventually., Your efforts are especially useful for us in small HOA’s, only 3 directors, with limited resources! Thank you so much.”
This work is not all kudos. I had a sad commentary from an owner in a comment on the blog at condolawguru.com. She seemed to feel the world was against her and so were HOA lawyers. I posted the comment in the interest of staying balanced as showing all views, but hers is pretty lost and hopeless. She asked what was my purpose in doing the blog (her assuming it was self-serving I think and not in the interest of owners). My mission in blogs and the E-news and my website offering all kinds of free and affordable articles and publications is to educate. Hopefully if people are more educated that live in HOAs, they can be better owners and directors, and more fully understand their plight and options if they get on the wrong side of things. She missed the point on that because she has made assumptions including that all lawyers are “on the side” of the HOA boards. I don’t disagree entirely – I come across many lawyers representing HOAs that have a hard conceiving that a board could be the problem, but this person’s crying unfair to the very possibly the best homeowner legal resource in the state for owners did not elicit a bunch of sympathy.
Anyway, this blog is to followup and let you all know that any director that is in a conflict of interest situation and blunders ahead without regard to the other board members (perhaps by leaving them out of the decision making process), or with regard to the governing documents or the law (ignorance is no excuse here), may find themselves on the wrong side of a lawsuit. They can be sued by their own association. This has happened in a case that is being appealed to the Supreme Court of California. The Association sued an individual director claiming she had responsibility for losses due to a contract that went south. The trial court said the director (an 87 year old woman) could hide behind the business judgment rule and get out of the lawsuit. The appellate court said she could not. In lay terms, the cases are procedural, to determine whether she has to go to court as a defendant or can get out of it. As of this moment, she is still in the fray because of the appellate court decision. If the Supreme Court takes the matter up (it is not required to do so), the outcome could go either way, with the trial court or with the appellate court decision.
The ultimate rule of law in this case should settle whether a trial court should apply the “Business Judgment Rule” as a shield to a director’s actions to avoid looking too deeply into what was done, or whether the trial court should dig deeper to see if the director can prove diligent inquiry or investigation occurred before she signed the contracts and the loan documents. Having a court look deeper as opposed to letting you out of a lawsuit is very scary. It means you participate in trial and could have some responsibility for losses of the HOA. Hopefully you are not in a conflict of interest situation (even if it has been approved by the board and disclosed).
Because one thing is clear by some of the language in the case, if a director is in a conflict of interest situation, even if it is disclosed as in some cases is sufficient (as the E-news indicated), he or she has to watch their step. This is why — as quoted in the CURRENT appellate court decision in the case of Palm Springs Villas II HOA v. Parth – the business judgment rule does not shield a director in a conflict of interest situation.
“a. Principles governing decision-making by a director.
“The common law `business judgment rule’ refers to a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. . . . Under this rule, a director is not liable for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 (Gaillard); see Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 123 (Ritter) [business judgment rule “sets up a presumption that directors’ decisions are based on sound business judgment”].)”
What the public might not understand here is that if the director at the center of this storm does end up going to trial she still gets to defend herself, and probably on the D&O carrier’s dime (as far as it stretches), and the evidence might show that the entire board is culpable, that reasonable diligence was exercised, or that there is some forgivable reason the director acted the way she did (advised by an “expert”?)
What the above commenters of my newsletter do have in their corner is that this case may make directors think twice about acting unilaterally or arrogantly – assuming that they know about it. Stay tuned … and pass on the information through your own channels to those who need to hear it about what this case means. There will be A LOT more written about it. I will be coming out and saying that DIRECTORS need to care about doing their job right, not care about what their cronies want or how they can abuse their “power” to harass, discriminate against, pick on, or pull the rug out from under an owner with whom they do not agree.
I have talked about this recently in other posts, and will continue to do so in future posts and the next E-newsletter which will be a cautionary note specifically about what the case means to everyone in HOAs. Be sure to sign up at www.californiacondoguru.com for the free E-news right away!
I have been a condo-homeowners association attorney for more than 24 years. I like helping people get their arms around their homeowner association problems and find a solution. A balanced attitude can go further to resolve issues than just about anything else.
Every day I am made aware through some email, call, question, or resource how hard it is for volunteers of
Here is the question sent to me that triggered this blog: “My condo association is looking to do a special