. As volunteers, directors are protected against personal liability by the Business Judgment Rule
i.e., when they perform their duties (i) in good faith, (ii) in a
manner the director believes to be in the best interests of the
association, and (iii) with such care, including reasonable inquiry, as
an ordinarily prudent person in a like position would use under similar
Breach of Duties
. As part of their reasonable inquiry or "due diligence," boards can seek
the advice of legal counsel. (Corp. Code §7231(b)
.) Failure to seek advice
on an important legal issue
that results in damage to the association could serve as the basis for an action against the board for breach of their fiduciary duties
. Following are categories of matters and events where boards should seek legal advice:
Amending Documents. Whenever CC&Rs and bylaws are amended or restated, legal counsel legal should be involved in drafting and recording the changes.
Architectural. Failure to enforce as well as arbitrary and capricious enforcement can lead to costly litigation. Whenever
an architectural dispute arises, legal counsel should be called to
discuss how to achieve proper resolution or to position the association
- Assessment Collection. Setting up proper collection policies and consistently following those policies is important to maintaining the association's finances and minimizing legal challenges.
Contracts. Agreements not reviewed by an attorney can have significant hidden liabilities.
Ethics. Whenever a director or committee member has a conflict of interest and refuses to recuse themselves, it is time to call legal counsel.
Injuries. Whether it be slips and falls or other types of
injuries in the common areas involving residents, guests, employees,
vendors or otherwise, injuries should immediately be reported to insurance and to the association's attorney so conditions can be documented and steps taken to protect against further injury.
Lawsuit Threatened. In addition to putting the
association's insurance carrier on notice of a potential claim, boards
should talk to counsel about how best to respond to the threat so as to
(i) reduce the risk that a claim is actually filed, (ii) better position
the association to defend itself in the event one is filed, and (iii)
take the matter into ADR if appropriate.
Lawsuit Served. Tendering a claim
to the association's insurance carrier is the first order of business.
Sending a copy of the complaint to the association's attorney is the
second. General counsel needs to know of the litigation so he/she can
protect the association's interest in the event insurance is slow to
respond or declines coverage. In addition, the board may need guidance on how to respond to the plaintiff on issues outside of the litigated matter.
Personnel. The most common high-risk areas are when an employee
is hired, disciplined or fired. Employment litigation tends to be
expensive so it is best to avoid it.
Recall Petition. Emotions run high in recall elections and issues of defamation often arise. Failure to properly handle a recall can lead to significant problems.
Request for Reasonable Accommodation. Failure to properly evaluate and respond to a request for disability accommodation can result in costly litigation.
Rules & Regulations. At least once, the association's rules and regulations should be reviewed to make sure proper fine and hearing procedures have been established and to ensure they are enforceable (and not discriminatory, such as rules against children or restrictions on who may use pools, etc.). If enforcement issues are more than routine because of the particular individuals involved or because the issues may be more complex than normal such as with architectural issues, then legal counsel should be consulted before matters deteriorate into litigation.
Vendor Disputes. Disputes between the
association and its vendors can erupt into litigation. Legal counsel
needs to analyze appropriate contract provisions, evaluate the alleged
breach, and advise the board on how best to resolve the dispute.
: This list does not cover all situations. Instead, it provides broad categories. See following legal advice
: Associations needing legal assistance can contact us
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