HOA DIRECTORS IN CALIFORNIA – WATCH OUT! READ THIS.

Rogue Directors – Beware – HOA Director Liability -What is Happening in California?

Here’s the general question of importance in this blog:

Are California HOA Board Directors protected in California for their actions on the Board? Does the “business judgment rule” still apply?

This is definitely a hot topic in our state. One of my readers asked for an update blog on director liability. She asked what was happening with the Palm Springs Villas II Homeowners Association, Inc., vs. Erna

Parth case from 2016 and also AB 1412. I note that the news if you google this cases has gone dark, meaning there is no followup to the firestorm from 2016 reporting on the findings of this case. There is a reason I think, that the “beg” to the Supreme Court to review this decision did not go well.

This is the best advice I can offer to you after you read this:

1.   Don’t panic

2.   Don’t try to figure it out on your own if you have a circumstance that begs the question “Could there be personal responsibility in this scenario?

3.   Sign up for the E-news and watch for the June edition which will provide some advice on what to do, and what not to do, if you are a director and find yourself acting unilaterally for any reason! Or if you are on the other end and are dealing with a rogue director and want it to stop? You can do this at www.californiacondoguru.com.

Here’s an update:

On October 12, 2016, the Supreme Court of California denied review of the pending legal case determination that Director Parth must go back to trial to determine possible financial responsibility for her unilateral actions in signing association contracts that obligated the owners and resulted in losses to the association.

What does that mean? It means that the appellate court case in the fourth District Court of Appeals stands as binding California law. What does that mean? It means that directors in homeowner associations in the state of California should not be acting unilaterally. If they do, they might find themselves at the wrong end of a lawsuit challenged with responsibility for any losses at the Association suffers because of actions gone wrong. This might include contracts, discrimination claims (see consecutive blog on new discrimination laws), harassment charges, violating confidentiality and executive session privileged information, and any other actions taken by a “rogue” director.

I only use the term rogue meaning a director has taken the reins. It might very well be that the director who found themselves in the position of making all of the decisions was acting with good intentions. It may be that the other board members were recalcitrant and somebody needed to do something. It may be that the Association membership is so apathetic that the only people  anyone can get to serve on the board with them will be “seat fillers”, not be part of the decision-making process. And of course, it might be that the director is obnoxious, pushy, threatening, abusive, or lots of other things I won’t mention. In any case, if you are in an HOA where you are the only one willing to do any work, or you are running a board roughshod and coercing others to accept your bidding, it’s time to get real. I believe it entirely possible that other board members could equally be swept into the net if they sit by and to do anything about a director that is making all the decisions.

There is more on to know about director liability. There are some protections in place in California law found at Civil Code Section 5800 (you can go directly to this law on the California state website at www.ca.gov and plug this statute into the query box and get right to it), and there are similar “safe harbor” laws for incorporated homeowner associations in the Corporations Code. But they all rely specifically on a these findings, which used to be presumed unless proven otherwise but not are not presumed but may have to be proved by any director who is sued.

 (1) The act or omission was performed within the scope of the officer’s or director’s association duties.

(2) The act or omission was performed in good faith.

(3) The act or omission was not willful, wanton, or grossly negligent.

According to the California state website, AB 1412, a bill in progress, recently modified some portions of the director liability statute in California, Civil Code Section 5800 .  Here is the report as of May 17, 2017: This is the current version with legislative notes on the effect and the statute itself with proposed amendments in it.

Legislative notes:

“This bill would extend the limitation on the personal liability…  of a director] “to a volunteer officer or director of a development that is mixed use in which a when the volunteer officer or volunteer director does not own more than 2 residential separate interests. is a tenant of a residential separate interest or is an owner of no more than 2 separate interests and whose ownership in the common interest development consists exclusively of residential separate interests”.

Here is the language of the actual law showing modifications in the recent legislative report:

“ Section 5800 of the Civil Code is amended to read:

(a) A volunteer officer or volunteer director described in subdivision (e) of an association that manages a common interest development that is exclusively residential or, if the development is mixed use, a volunteer officer or volunteer director who does not own more than two residential separate interests, or mixed use shall not be personally liable in excess of the coverage of insurance specified in paragraph (4) to any person who suffers injury, including, but not limited to, bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortious act or omission of the volunteer officer or volunteer director if all of the following criteria are met:

(1) The act or omission was performed within the scope of the officer’s or director’s association duties.

(2) The act or omission was performed in good faith.

(3) The act or omission was not willful, wanton, or grossly negligent.

(4) The association maintained and had in effect at the time the act or omission occurred and at the time a claim is made one or more policies of insurance that shall include coverage for (A) general liability of the association and (B) individual liability of officers and directors of the association for negligent acts or omissions in that capacity; provided that both types of coverage are in the following minimum amounts:

(A) At least five hundred thousand dollars ($500,000) if the common interest development consists of 100 or fewer separate interests.

(B) At least one million dollars ($1,000,000) if the common interest development consists of more than 100 separate interests.

(b) The payment of actual expenses incurred by a director or officer in the execution of the duties of that position does not affect the director’s or officer’s status as a volunteer within the meaning of this section.

(c) An officer or director who at the time of the act or omission was a declarant, or who received either direct or indirect compensation as an employee from the declarant, or from a financial institution that purchased a separate interest at a judicial or nonjudicial foreclosure of a mortgage or deed of trust on real property, is not a volunteer for the purposes of this section.

(d) Nothing in this section shall be construed to limit the liability of the association for its negligent act or omission or for any negligent act or omission of an officer or director of the association.

(e) This section shall only apply to a volunteer officer or director who is a tenant of a residential separate interest in the common interest development or is an owner of no more than two separate interests and whose ownership in the common interest development. development consists exclusively of residential separate interests.

(f) (1) For purposes of paragraph (1) of subdivision (a), the scope of the officer’s or director’s association duties shall include, but shall not be limited to, both of the following decisions:

(A) Whether to conduct an investigation of the common interest development for latent deficiencies prior to the expiration of the applicable statute of limitations.

(B) Whether to commence a civil action against the builder for defects in design or construction.

(2) It is the intent of the Legislature that this section clarify the scope of association duties to which the protections against personal liability in this section apply. It is not the intent of the Legislature that these clarifications be construed to expand, or limit, the fiduciary duties owed by the directors and officers.

***

Final Note:

The cost of Directors and Officers liability coverage may go up due to the Parth decision. So here are some parting thoughts from Joel Meskin, California {in my view expert resource] D&O insurance broker.

“Having been involved to one degree or another with between 5,000 to 6,000

community association D&O claims, I find that the cause of most claims is

the result of one or more of the following: (1) unit owners do not read

the governing documents before buying and volunteer board members do not

re-read the governing documents before accepting a board position, (2) the

volunteer board members turn their board position into something it is

not, and (3) they do not use community association professionals when they

need it.”

 

Joel W. Meskin, Esq., Vice President Community Association Insurance &

Risk Management.  Contact information: McGowan Program Administrators | 20595 Lorain Rd | Fairview Park, OH 44126

(: 440.333.6300 x2240| cell (: 216.385.5610|7: 440.333.3214 | *

Jmeskin@mcgowanins.com

  • Share/Bookmark

Sorry, comments are closed for this post.