Protection For Volunteers: Business Judgment Rule

board members h o a homefront legislation Oct 03, 2016

Association directors are unpaid, serving their neighbors as volunteers – is it fair that they can be sued for the decisions they make? The Business Judgment Rule is the first thing all directors should learn, but well-meaning directors unwittingly stray beyond its protection.

The rule

Directors operating under the Business Judgment Rule are personally protected from liability, even from actions which turn out to be mistakes. The Business Judgment Rule is found in Corporations Code 7231(a):

“A director shall perform the duties of a director … 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 Business Judgment Rule is simple, requiring that actions be in good faith, in the best interests of the entire community, and based upon reasonable inquiry. However, volunteer directors too often are exposed to risk of personal liability by not meeting these three requirements.

Good faith

Good faith is not simply good intentions or a pure heart. Good faith is also not being in bad faith, and others (judges or jurors) will decide from your actions and statements what were your intentions. 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 be treated consistently, so horrible abusive members are entitled to the same roof repair as saintly, grateful members. Some past statements or e-mails can be taken out of context, with dangerous results. Make sure every statement you make in board meetings, and every e-mail, is carefully worded — and avoid intemperate or sarcastic remarks.

In Association’s best interests

Of course, every board action should be in the association’s best interests, and every director thinks they are doing the best for their HOA. Is there any possibility of a claim of conflict of interest, or favoritism? Then back off – recuse yourself from the discussion and vote, and make sure you demonstrate that you only work for the HOA’s best interests (and not your own). The best way of recusing oneself is to ask that the particular item be moved to the end of the agenda, and then leave the meeting before the board handles that item.

Reasonable inquiry

The board must have the appropriate qualified input before it makes a decision. 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 may be needed.

Well-meaning directors often innocently violate this requirement by either providing their own expertise (“I think that wall is structurally sound”) or by refusing to endorse the hiring of the appropriate consultant (“engineers are too expensive, can’t we figure this out?”).

A director’s role is to make decisions based upon the information brought to the board. Make sure the board has sufficient and qualified input, appropriate to the decision. Sometimes boards must spend money to know its decision is correct.

Three legged stool

The Business Judgment Rule is a three-legged stool. Lose one of the legs, and the result can be painful.


Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.