HOA Homefront: How the Business Judgment Rule protects volunteers

Association directors are unpaid volunteers serving their neighbors – so is it fair that they could be sued for their volunteer work?

The Business Judgment Rule is the first thing any director should know, yet well-intentioned volunteers often unwittingly stray beyond its protection.

Last week’s column discussed an important new appellate decision, Eng v. Opperman, explaining how the BJR protects HOAs. So, how do HOAs fall under that protection?

The rule

Directors operating under the BJR are personally protected from liability, even from actions which turn out to be mistakes.

The BJR is found in Corporations Code 7231(a), which says that directors must perform their duties “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.”

The BJR requirements on HOA actions are simple: Good faith, acting in the best interests of the entire community, and reasonable inquiry.  Directors risk personal liability by not meeting these three requirements.

Good faith

Good faith is not simply good intentions or a pure heart.

Good faith is the absence of bad faith, and others (judges or jurors) will decide your good faith from your actions and statements. So what is important is not what YOU think, but what someone else thinks of your actions.

Could someone claim a decision is in bad faith and retaliatory against “that member”? (You know – the one who always criticizes, complains, and abuses volunteers.)

The law requires members all be treated consistently, so unpleasant abusive members are entitled to the same roof repair as saintly grateful members. Past statements or e-mails can be taken out of context, with dangerous results, so carefully phrase your statements in board meetings or in e-mails, — and avoid intemperate or sarcastic remarks.

Association’s best interests

Every board action should be designed to advance the association’s best interests, and every director thinks they are doing the best for their HOA.

If there is any possibility of the appearance of conflict of interest or favoritism, then back away, Recuse yourself from the discussion and the vote, thereby eliminating any accusation you voted to serve your individual personal interests instead of the Association’s. The best way to recuse yourself is to ask that the item be moved to the end of the agenda so you can leave the meeting before the item is discussed.

Reasonable inquiry

The board must have the appropriate qualified input before it makes decisions.

A manager’s input may be all that is required, depending upon the size and complexity of the issue. However, if the matter is serious, large, or complex, more specialized expertise might be needed.

Well-meaning directors often innocently violate this requirement by either providing their own opinion (“That wall looks structurally sound”) or by opposing the hiring of appropriate expertise (“engineers are expensive, can’t we figure this out?”).

Directors should make reasonable decisions based upon the information brought to the board. Make sure the board has sufficient and qualified input appropriate to the decision at hand. Sometimes boards must spend money to confirm its decision is correct.

The Business Judgment Rule is like a three-legged stool. If even one leg is missing, the result can be painful – and dangerous.

Richardson, Esq. is a fellow of the College of Community Association Lawyers and partner of Richardson Ober LLP, a California law firm known for community association advice. Submit column questions to kelly@roattorneys.com.