Standard 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.
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,
Recommendation: Boards should adopt an Ethics Policy for directors to follow.
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