The Business Judgment rule is one of the most important things a good director should know well, because it protects directors from liability. However, well-meaning directors can accidentally stray outside of its protections.
The "Business Judgment Rule" (hereafter, "BJR") is found at Corporations Code Section 7231, which states that a director is personally protected from liability, so long as it operates within the BJR, which is found at subsection (a):
"A director shall 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, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances."
So, if a volunteer director acts:
- With good faith;
- Believing the action is in the best interests of the entire association; and
- With reasonable inquiry.
Then the director is not responsible personally, even if it turns out the board made a bad decision that financially harmed the association.
It's not that simple
Every day, good people step outside of the BJR, leaving themselves needlessly exposed to risk of personal liability. The potential tragedy is that most of these people leave the BJR's protection unknowingly but based on a belief they are helping their association. Most times, luckily, it works out.
Good faith is not simply good intentions or a pure heart. Good faith is making a decision which is not bad faith. The people who decide whether something is in good or bad faith will be judges or jury members. So what is important is not what YOU think, but what somebody else thinks of the action and the evidence about it.
Could one argue that a decision is based upon a desire to retaliate against "that member"? You know, the one who always criticizes, perhaps even abuses the board? The law requires that members are treated consistently, so the horrible abusive member is entitled to the same roof repair as the saintly, thankful member.
You may be making a decision that sets aside your differences with a neighbor, but sometimes past statements or even e-mails can be taken out of context, with dangerous results. Make sure that every statement you make in front of people, and every e-mail, is carefully worded -- and avoid intemperate or sarcastic remarks.
"In Interest of Association as a Whole"
Of course, every action by a board should be in the best interests, and I am sure every director thinks they are doing the best for their HOA. But who decides if your motivation was correct, and how do they do it? A judge or jury would look at your actions, your statements and the surrounding facts, and from that determine if you reasonably believed you were working for the HOA's best interests (and not your own).
How fastidious are you in avoiding conflicts of interest, or apparent conflicts? Do you make sure that, in an overall remodel of the property, the directors' homes are remodeled last (not first!)? Do you make sure the minutes show that before the board discusses your home or building, you left the meeting during that discussion (or at least sat in the audience and not at the board table)?
"With Reasonable Inquiry"
The board must make sure it has the appropriate qualified input before it makes a decision. A manager's input may be all that is required, depending upon the size and complexity of the issue. However, if the matter is serious, large or complex, more expertise may be needed.
Well-meaning directors often innocently violate this requirement by either providing their own expertise ("I think that wall is structurally sound") or by refusing to endorse the hiring of the appropriate consultant ("engineers are too expensive, can't we figure this out?")
A director's job is to make decisions based upon the information brought to the board. Make sure the board has sufficient and qualified input, appropriate to the decision. Sometimes the board must spend money to know it is right. That is why you have lawyers, engineers and other experts.
Three Legged Stool
The Business Judgment Rule is a three-legged stool. Skip any one of the legs and you know what happens ... headache!
Thanks to Kelly G. Richardson Managing Partner of Richardson Harman Ober PC, a law firm known for community association advice for this important information. Direct questions to krichardson@RHOPC.com and check out their website at www.rhopc.com