Volunteer Defined

California’s Corporation Code § 5239(b) defines “Volunteer” to mean the rendering of services without compensation. “Compensation” means remuneration, whether by way of salary, fee, or other consideration, for services rendered. However, the payment of per diem, mileage, or other reimbursement expenses to a director or executive officer does not affect that person’s status as a volunteer within the meaning of this section. Payment of per diem, mileage, or other reimbursement expenses to a director or executive officer does not affect that person’s status as a volunteer. (Corp. Code § 7231.5(b); Civ. Code § 5800(b)) For example, if a director buys light bulbs for the common areas using his own money, the association can reimburse him without impacting his volunteer status. Directors should ALWAYS produce a receipt for any items they seek reimbursement for.

The board members of a homeowners association are seldom professional managers, are very often uncompensated and most often are neighbors. Undoubtedly, the specter of personal liability would serve to greatly discourage active and meaningful participation by those most capable of shaping and directing homeowner activities. (Jaffe v. Huxley Architecture (1988) 200 Cal.App.3d 1188, 1193) 

[T]he services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California ... It is the public policy of this state to provide incentive and protection to the individuals who perform these important functions. (Corp. Code § 5047.5(a))

Business Judgment Rule

The Business Judgment Rule protects board members from personal liability for decisions that could result in damage or loss to others. For more information, see "The Business Judgment Rule."

Davis-Stirling Insurance Protections

Protecting Directors from Personal Liability. As provided for in Civil Code § 5800(a), a volunteer officer or director who owns no more than two separate residential interests (Civ. Code § 5800(e)) is not personally liable in excess of the association’s insurance for bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortious act or omission of the officer or director if all of the following criteria are met:

• The act or omission was performed within the scope of the officer’s or director’s association duties.
• The act or omission was performed in good faith.
• The act or omission was not willful, wanton, or grossly negligent.
• The association maintained and had in effect at the time the act or omission occurred, and at the time a claim is made, one or more policies of Directors & Officers Insurance in the following minimum amount: At least $500,000 if the association consists of 100 or fewer separate interests; At least $1,000,000 if the association consists of more than 100 separate interests.

Protecting Owners from Personal Liability. Civil Code § 5805 protects owners from individual liability if their association maintains at least the following minimum insurance levels: $2 million for associations with 100 or fewer separate interests, and $3 million for associations with more than 100 separate interests. The protection applies to both incorporated and unincorporated associations. For more information, see Commercial General Liability Insurance. 

Governing Document Protections

Most, but not all, association CC&Rs and bylaws include hold harmless and indemnity provisions that protect directors and officers from liability for negligent acts and omissions while in office. If the language is missing, you can add it when you amend the governing documents. An association may defend itself and its directors.

Indemnity Protections

The Corporations Code provides that “A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding.” (Corp. Code § 7237(b)) “Proceeding” means any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative. (Corp. Code § 7237(a)) In addition to the right to defend itself, an association owes a duty of indemnification to its directors to the extent a complaint arises out of actions undertaken on behalf of the association (Fidelity Mortgage Trustee Serv., Inc. v. Ridgegate E. Homeowners Ass’n (1994) 27 Cal.App.4th 503, 525)

501(c)4 Corporations

Some homeowner associations qualify as a 501(c)(4) social welfare organization because they benefit the entire community, not just their members. As such, their board members have additional liability protection under section 425.15 of the Code of Civil Procedure. This particular statute establishes a procedure for filing a claim against their directors. Before a cause of action against a board member can proceed, a plaintiff must first submit a verified petition with supporting affidavits that establish the underlying facts supporting the claims against a director. The director responds with his/her own evidence. If a court determines that the evidence supports a claim against the director, the case can proceed. If the judge is not convinced, the case cannot proceed. This prevents frivolous lawsuits against directors.

Case Law Liability Protections

An officer or director will not be liable for torts in which he does not personally participate, of which he does not know, or to which he has not consented. While the corporation itself may be liable for such acts, the individual officer or director is immune unless he authorizes, directs, or otherwise meaningfully participates in the wrongful conduct. To maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed, or participated in allegedly tortious conduct, or that, although they specifically knew or reasonably should have known that some hazardous condition or activity under their control could injure the plaintiff, they negligently failed to take or order appropriate action to avoid the harm. The plaintiff must also allege and prove that an ordinarily prudent person, knowing what the director knew at that time, would not have acted similarly under the circumstances. (Frances T. v. Village Green Owners Ass’n (1986) 42 Cal. 3d 490, 503-04, 508-09)

A board of directors' mistake of judgment does not justify taking control of corporate affairs from the board and placing it with the stockholders. The board of directors may make both correct and incorrect decisions, so long as it remains faithful to the corporation and exercises its best business judgment. (Behan v. Lido Isle Community Ass’n (1977) 70 Cal.App.3d 858, 866)

Generally, courts will uphold decisions made by the governing board of an owners’ association so long as they reflect good-faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy. Thus, subordination of individual property rights to the collective judgment of the owners’ association, together with restrictions on the use of real property, comprise the chief attributes of owning property in a common interest development. Inherent in the condominium concept is the principle that to promote the health, happiness, and peace of mind of the majority of the unit owners, since they are living in such close proximity and using facilities in common, each unit owner must give up a certain degree of freedom of choice which he/she might otherwise enjoy in separate, privately owned property. (Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361, 374)

Elements of the Business Judgment Rule. California also has a statutory business judgment rule. Corporation Code § 7231(a) provides that a director must perform the duties of a director in good faith, in a manner such director believes to be in the best interests of the corporation and with such care as an ordinarily prudent person in a like position would use under similar circumstances. Subdivision (b) provides that the director is entitled to rely on information, opinions, and reports presented by certain specified persons. Finally, subdivision (c) provides that a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director. The rule provides further that no cause of action for damages shall arise against any volunteer director based upon any alleged failure to discharge the person’s duties as a director of a nonprofit organization if that person: (1) performs the duties of office in good faith; (2) performs the duties of office in a manner believed to be in the best interests of the corporation; and (3) performs the duties of office with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. (Corp. Code § 7231.5(a))

Presumption. The business judgment rule presumes that directors’ decisions are based on sound business judgment. This presumption can be rebutted only by a factual showing of fraud, bad faith, or gross overreaching. The business judgment rule does not create a presumption that applies when a court is evaluating the committee’s independence or whether the committee acted in good faith in the first instance. (Ritter & Ritter v. The Churchill Condo. Ass'n (2008) 166 Cal.App.4th 103, 122-123)

[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 (2016) 248 Cal.App.4th 268)

[N]either a court nor minority shareholders can substitute their business judgment for that of a corporation where its board of directors has acted in good faith and with a view to the best interests of the corporation and all its shareholders. The power to manage the affairs of a corporation is vested in the board of directors. Where a board of directors, in refusing to commence an action to redress an alleged wrong against a corporation, acts in good faith within the scope of its discretionary power and reasonably believes its refusal to commence the action is good business judgment in the best interest of the corporation, a stockholder is not authorized to interfere with such discretion by commencing the action. Every presumption is in favor of the good faith of the directors. Interference with such discretion is not warranted in doubtful cases. (internal citations and quotation marks deleted; Behan v. Lido Isle Community Ass’n (1977) 70 Cal.App.3d 858, 865)

[T]he business judgment rule may protect a director who acts in a mistaken but good faith belief on behalf of the corporation without obtaining required shareholder approval.”... “[T]he [business judgment] rule . . . protect[s] well-meaning directors who are misinformed, misguided, and honestly mistaken.” (Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 131-132, 137)

Judicial Deference

A related rule, the “Business Judgment Doctrine” or “Judicial Deference,” allows courts to defer to a board’s business decisions even if a reasonable person could have acted differently. Absent an abuse of discretion, courts will respect a board’s decision.

Volunteer Protection Act of 1997

The Center for Community Economic Development analyzed the Federal Volunteer Protection Act of 1997 and compared its protections against those provided by California laws. The article found that “In some cases, the federal law slightly expands the protections available in California to volunteer directors and officers of nonprofit corporations, tax-exempt under Internal Revenue Code Section 501(c)(3). In other cases, California law provides broader protection. However, the insurance requirements of California law serve to defeat much of the protections available under both federal and California law.”

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