Director's Right to Inspect is Limited
With limited exceptions, board members have both a right and a duty to review the association's financial records. Although Corporations Code § 8334 gives a director the "absolute right" to review corporate records, the courts have limited that right to protect privacy, avoid conflicts of interest, and protect attorney-client privilege.
Privacy. In Chantiles v. Lake Forest, a candidate ran for the board and won, but thought his friend should have won as well. As a new director, he wanted to inspect proxies to see how people voted. The board refused, and he sued. The court agreed with the board and decided that privacy rights outweighed a director's "absolute" right to inspect records. (Chantiles v. Lake Forest II)
Conflict of Interest. In Tritek Telecom v. Superior Court, a board member of a nonprofit corporation sued the corporation. During the litigation, the director claimed an absolute right to view the corporation's records related to his litigation against the corporation. The board refused, citing attorney-client privilege. The Court of Appeal agreed with the board. It reasoned that a plaintiff director could not take off his "shareholder's hat" and swap it for his "director's hat" to claim an absolute right to access all corporate documents when doing so would advance his interests against those of the corporation. (Tritek Telecom v. Superior Court) In Wolf v. CDS Devco, the court held that a director who threatened litigation against the association waived his right to inspect specific corporate records. The court reiterated its earlier holding in Tritek v. Superior Court that a court may properly limit a director’s inspection rights when the director’s loyalties are divided, and documents obtained by a director could be used to advance the director's personal interest in obtaining damages against the corporation.
Violation of Fiduciary Duties. Courts may impose conditions upon a director's right to inspect a corporation's books and records. A director's right to inspect may be denied when a disgruntled director announces an intention to violate his fiduciary duties. (Havlicek v. Coast-to-Coast Analytical Services)
Potential Tort Against the HOA. "Where the corporation determines that an unfettered inspection will result in a tort against the corporation, it may decline the request for inspection." (Havlicek v. Coast-to-Coast Analytical Services)
Executive Minutes. Board members can review past and present executive session minutes unless a director has a conflict of interest involving a topic discussed at a particular executive session meeting at which he/she was not present. This restriction also applies to recordings (if any) of executive session meetings. (Hamilton v. Town of Los Gatos)
Personnel Records. Despite the “absolute” language of Corporations Code § 8334, the courts do not treat directors’ rights as absolute and are willing to limit them to protect constitutional rights and to prevent the improper use of records. In Chantiles v. Lake Forest II, board member Tom Chantiles sought to compel the association to permit him to inspect ballots cast in an annual election of directors. This was before the implementation of secret balloting, which meant Chantiles would have learned from the inspection how each member voted. The court weighed Chantiles’ “absolute” rights as a director against the privacy rights of the membership and sided with members. The court held that privacy rights outweighed inspection rights in the context of voting. Employees have a right to privacy. In Gilbert v. San Jose, (2004) 114 Cal.App.4th 606, the court examined common-law protections and held that before a city could disclose personal information collected under a city ordinance from employees working in the gambling industry, the employees must be given a fair opportunity to object to the disclosure and to limit the scope and nature of the information disclosed. Otherwise, the employees may have a claim for invasion of privacy under both common law and the California Constitution.
Board Review. Even though individual directors cannot rummage through members' files or personnel records, the entire board could review an owner's or employee's file related to a pending disciplinary action, maintenance issue, etc.
Recommendation: When presented with a request from a director to inspect an employee’s personnel file, boards should notify the employee of the request and afford the employee a fair opportunity to object to disclosure of all or a portion of the records. In determining whether to comply with the request, boards should weigh the director’s right to inspect against the employee’s right to privacy. In doing so, boards must consider (i) whether the director has a legitimate purpose for the information, (ii) whether the director can fulfill his/her duties without inspecting the file, and (iii) the employee’s objections, if any. Based on prior related rulings, a court would likely deny a director’s request to inspect personnel files because an employee’s right to privacy outweighs a director’s right to inspect corporate records. Therefore, boards may want to err on the side of protecting the employee’s right to privacy and deny the director’s request. From a legal standpoint, the association would be in a better position to defend itself in a lawsuit by a director denied access to an employee’s personnel file than in an invasion-of-privacy suit by an employee.
Former Directors
Former directors do not have any special inspection rights by virtue of their having served as directors. Their inspection rights are the same as those of any other member of the association. As such, former directors do not have the right to inspect executive sessions or "director-only" records. For HOAs, director-only records generally encompass executive session matters. Former directors continue to have the same inspection rights as other members, but nothing more. An exception may apply if the former director is being sued for acts taken in his capacity as a director and needs the records to defend himself. (Wolf v. CDS Devco)
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.