Reader Questions - Giving Our Board a (Financial) Break

Dear Mr. Richardson,

We just received a set of amended bylaws and CC&Rs presented to us for a vote. One section concerns us, it says that the board can vote itself a waiver of monthly assessments if the HOA is self-managed. The board states that the documents have been approved by an attorney they hired to help them with updating these documents. You wrote previously that if an association has no professional manager, it is probably innocently violating many laws.

Your column is awesome!

Sincerely,

D.W., Goleta

Dear D.W.,

The Davis-Stirling Common Interest Development Act has become so complicated and changes so often that it is quite difficult for associations to operate without a qualified and competent professional manager (either general managers on-site or portfolio managers working through a company). To operate completely in compliance with the law and its extensive disclosures and procedures, a volunteer in a self-managed association will normally work so many hours that it seems unfair. Indeed, when I see associations having great difficulty filling seats on their board, it is usually because one or two directors work 20 or more hours a week on HOA business and potential board candidates are unable or unwilling to commit to that amount of time.

One idea which comes up occasionally is to give the directors a financial break since they are working for free for the community. Nothing in the Davis-Stirling Act specifically says the HOA cannot compensate volunteers. So, paying volunteers is not illegal. Most HOA bylaws have a provision banning HOAs from compensating a director for board service but allowing it to reimburse the director for out of pocket costs incurred on behalf of the HOA.

It may seem fair to help the hard working volunteers serving on the board, and there are many ways of compensating directors, such as assessment discounts or credits, rebates, or outright salaries. However, giving a director compensation in any form is a very bad idea.

California law provides some very powerful protections for volunteer directors. The “Business Judgment Rule” of Corporations Code Section 7231.5, which protects a volunteer director from liability so long as the director acts in good faith, seeking the best interests of the association, and with reasonable care. Take any compensation, even a dollar, and that immunity from the Business Judgment Rule is gone.

The Davis-Stirling Act contains another powerful protection for volunteers at Civil Code 5800. If the association has directors and officers insurance (“D&O”) coverage in place (different from the HOA’s normal liability insurance) in the prescribed amounts, volunteer directors are personally immune (protected) from liability for their actions, so long as they act within their role, in good faith, and are not acting deliberately or grossly negligently. Directors receiving any compensation for their service are no longer volunteers and lose this important legal protection.

Some may argue that volunteers taking on management duties are not acting as a director, but are simply unpaid managers. However, managers, paid or unpaid, are not covered by the immunities described here.

It’s not worth it. Don’t accept compensation. Preserve that volunteer status and the immunities which come with it. Hire a manager to keep current and handle the many tasks now being handled by the overworked and unpaid volunteers.

Kelly

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®.