Director Due Diligence
Adams Stirling PLC
Menu

DUE DILIGENCE (Duty to Investigate)

"Due diligence" or the duty to investigate is one of the fiduciary duties of directors. Association boards of directors must make reasonable inquiry of rules violations, maintenance issues, reserve components, association finances, etc. before making decisions. This does not mean they must personally inspect water leaks or personally talk to vendors--they can rely on managing agents, committees or others to gather information for their review and discussion.

A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment. (Burt v. Irvine Co.)

We hold that where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. (Lamden v. La Jolla Shores.)

[I]n Lamden, ample evidence demonstrated the association board engaged in the sort of reasoned decisionmaking that merits judicial deference... [p]roof . . . that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by that doctrine.'”].) (Palm Springs Villas II v. Parth.)

Competent Advice. Boards may rely on the advice of persons they believe to be reliable and competent in the matters being presented. (Corp. Code §7231(b).) This means boards can rely on CPAs for financial and tax issues, attorneys for legal issues, etc. Following is a list of some of the advisors boards commonly rely on:

  • Accountants
  • Attorneys
  • Bankers
  • Consultants (elevators, roofing, architects, engineers, etc.)
  • Insurance brokers/agents
  • Managers
  • Reserve specialists
  • Vendors (landscapers, roofers, plumbers, electricians, etc.)

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC