Director Standards of Conduct
As fiduciaries, board members are held to a higher standard than fellow homeowners. To avoid personal liability for their decisions, the Business Judgment Rule requires directors to act in good faith. Associations have a duty to enforce their governing documents. When an association seeks to enforce its CC&Rs to compel an act by one of its owners, the association must show that (i) it followed its own standards and procedures prior to pursuing such a remedy, (ii) those procedures were fair and reasonable, (iii) its substantive decision was made in good faith and was reasonable, not arbitrary or capricious.
- Nor will courts enforce as equitable servitudes those restrictions that are arbitrary, that is, bearing no rational relationship to the protection, preservation, operation or purpose of the affected land. (Laguna Royale v. Darger.)
- ...restrictions should be enforced unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit. (Nahrstedt v. Lakeside Village.)
- ...enforcement of the restriction must be in good faith, not arbitrary or capricious, and by procedures which are fair and uniformly applied. (Nahrstedt v. Lakeside Village.)
- ...when an association determines that a unit owner has violated a use restriction, the association must do so in good faith, not in an arbitrary or capricious manner, and its enforcement procedures must be fair and applied uniformly. (Ironwood v. Solomon.)
- Enforcement of the restriction must be in good faith, not arbitrary or capricious, and by procedures which are fair and uniformly applied. The framework of reference, as the court made clear, is not the reasonableness specific to the objecting homeowner, but reasonableness as to the common interest development as a whole. (Liebler v. Point Loma.)
Good Faith - Bad Faith
Good Faith Defined. The good faith element is sometimes referred to as bad faith or lack of good faith when the requirement is violated by a director. A board member can be negligent carrying out his duties as a director and not be liable but if he acts in bad faith he can be held accountable for his actions. "Good Faith" is defined as:
...an intangible and abstract quality...encompass[ing], among other things, an honest belief, the absence of malice and absence of design to defraud or to seek an unconscionable advantage...Honesty of intention... (Pugh v. See's Candies, Inc. (1988) 203 Cal.App.3d 743, 763-764, quoting Black's Law Dictionary (5th ed. 1979) pp.623 and 127.)
Bad Faith Defined. What does it mean to act in bad faith?
"Bad faith" is the opposite of "good faith." It generally implies or involves actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive. "Bad faith" is not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that it contemplates a state of mind affirmatively operating with furtive design or ill will. (Pugh v. See's Candies, Inc. (1988) 203 Cal.App.3d 743, 763-764, quoting Black's Law Dictionary (5th ed. 1979) pp.623 and 127.)
An example is for a board to knowingly cause a contractor to breach his contract with the association so the association can cancel the agreement and enter into a less expensive one with another roofer. The board is arguably acting in the best interests of the association (saving money by reducing the cost of the construction project) but they are doing so in bad faith. As a result, the contractor can sue for damages. This happened to an association making extensive repairs following the Northridge Earthquake. The damages awarded to the contractor were substantial and drove the association to the edge of bankruptcy. Following is another example:
The trial court found the Association did not act in good faith based on inferences it drew from the fact that (1) no one from the Architectural Committee actually visited the site until long after the initial decision to require removal was made and well into the ADR process; (2) the Association acted upon and denied the Grossmans' appeal even while the ADR process was ongoing (which violated the spirit of Civ. Code, § 1363.820); and (3) the Association's decision was partially based on the Grossmans' failure to secure prior approval from the Architectural Committee. The record contains sufficient evidence to establish each of these facts. Therefore, substantial evidence (albeit circumstantial) supports the trial court's finding regarding the absence of good faith. This evidence and finding regarding the lack of good faith adequately supports the trial court's ultimate finding that the Association's decision was arbitrary and capricious. (Grossman v. Park Fort Washington.)
Bad Faith Invasion of Privacy. Another example is when a director takes private information from executive session and leaks it to the membership in the name of "transparency" because members have a "right" to know what occurred in executive session. Actually, they don't. Disclosing confidential information violates the law regarding executive sessions. If the association is sued for invasion of privacy, intentional infliction of emotional distress, etc., the misbehaving director could lose the protections of the Business Judgment Rule and be held personally liable for damages resulting from his unauthorized disclosures.
Interested Director. Another example of bad faith is when a director makes a decision that benefits the director at the expense of the association. For example, the director and persuades the board to award a contract to a roofing company without disclosing he has an ownership interest in the company,
Unreasonable, Arbitrary, and Capricious
Reasonable Defined. "Reasonable" is defined as fair, proper, just, moderate, suitable under the circumstances . . . not immoderate or excessive . . . rational, honest, equitable, fair, suitable . . . -Black's Law Dictionary. "Reasonable Care" is that degree of care which a person of ordinary prudence would exercise in the same or similar circumstances. -Black's Law Dictionary. There is no formula for the determination of reasonableness. Yet standards of this kind are not impermissively vague, provided their meaning can be objectively ascertained by reference to common experiences of mankind." (People v. Daniels (1969) 71 Cal.2d 1119, 1129.)
Unreasonable Defined. "Unreasonable is defined as those restrictions which are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit." (Liebler v. Point Loma Tennis Club (1995) 40 Cal. App. 4th 1600, 1604.)
Frivoulous Defined. The terms “frivolous, unreasonable, and without reason” are frequently used in fee-shifting statutes. Smith v. Selma Community Hospital (2010) 188 Cal.App.4th 1, articulates an applicable legal standard for frivolous within the context of Business and Professions Code section 809.9, which awards attorney fees to a prevailing party “if the other party’s conduct in bringing, defending, or litigating the suit was frivolous, unreasonable, without foundation, or in bad faith.” The court concluded “a matter is frivolous if any reasonable attorney would agree it is completely without merit in the sense that it lacks legal grounds, lacks an evidentiary showing, or involves an unreasonable delay.” (Retzloff v. Moulton Parkway Assn.)
Arbitrary & Capricious. An arbitrary decision is one based on random choice or personal whim. "Willful and unreasoning action, without consideration and regard for facts and circumstances presented . . . bad faith or failure to exercise honest judgment." -Black's Law Dictionary. Being Capricious means being subject to whim; impulsive and unpredictable. "A willful and unreasonable action without consideration or in disregard of facts or law or without determining principle." -Black's Law Dictionary
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