QUESTION: If the association sought and paid for a legal opinion, is the board violating their fiduciary duty if they ignore the opinion?
ANSWER: If board members stick their fingers in their ears and refuse to listen to legal counsel, that’s a problem. But, if they listen to the attorney’s advice, weigh it against other factors and reach a different conclusion, they are not necessarily in breach of their fiduciary duties.
Independent Decision. Boards are not required to let experts and lawyers make decisions for them. For example, an attorney and a termite expert might both advise a board to tent their condo buildings to stop a termite infestation. After taking into account the cost of tenting, the financial condition of the association, and the disruption to members who must be moved out of their buildings, the board can decide to spot-treat even though tenting is the superior method. This was the scenario in a case that made it all the way to the California Supreme Court. The Court sided with the board and held that,
[W]here 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…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; Corp. Code § 7231(a).)
Bad Advice. A second scenario under which boards can deviate from legal advice is when they believe the attorney is not knowledgeable or reliable in the issues presented. For example, if a divorce lawyer offers legal advice about HOA corporate matters, the board can (and should) disregard the advice. Instead, they should seek counsel from an experienced corporate attorney with expertise in community association law.
Clear Direction. A good HOA attorney will always tell directors what they need to hear, not what they want to hear. Some legal opinions are crystal clear, “No, you can’t do that!” Or, “If you want to call a meeting, here is what the law requires.” Many times, however, boards are presented with options–Option A or Option B (and sometimes, Option C). The board must then weigh the risks and rewards of each and make a business decision. The attorney might recommend Option A. But, because they are all viable options, the board might weigh factors differently and choose Option C.
Business Judgment. Did the board just ignore legal counsel and breach their fiduciary duties? No, they listened, weighed the choices and arrived at a different conclusion. Is it possible there could be fallout? Certainly. If Option C goes badly, so could the membership. Nonetheless, directors are protected from personal liability if they follow the Business Judgment Rule.
Recommendation: Boards should be cautious about not following competent legal counsel. If directors are uncertain about the advice given, they should get a second opinion.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.