Basic Training for Board Members

by Steven S. Weil, Esq.

Being on the board isn't easy. A newly elected director usually approaches the task with energy, enthusiasm, hope, a commitment to transparency and “getting things done.” This last task requires learning how to govern. Governance entails an understanding of the frame within which directors make decisions and the powers and duties they have under California law.

Governing has many aspects. Some obvious ones include being receptive to membership input, flexibility; and having the courage to look at hard issues and make sound decisions. Good governance includes operating within the parameters of the law and in states which are heavily regulated by statute, that isn't easy. How much “law” does a director (or a manager) need to know? How can they “compete” with those who – active on the internet – quote legal chapter and verse to attack the board; how can directors assess the validity of legal challenges without always engaging counsel. How can they know how to operate within legal bounds?

A Board of Directors Orientation is a good way for directors to get exposed to the key legal concepts affecting their authority and its limits. An orientation can address broad outlines of issues without getting lost in the detail. It can be based on general principles or peppered with specific provisions of an association's own governing documents – about, for example architectural control, indemnification, insurance, cumulative voting and proxies and claims. An orientation typically takes 45 – 90 minutes depending on dialogue between counsel and the directors or managers attending, the complexity of the community or particular issues it is facing.

This article discusses the basic outline for a comprehensive and practical orientation for associations in California (other states have different laws and organizational schemes). Of course, each one should be tailored to the needs and wishes of the board or manager attending and some topics would be eliminated and others added. Some may be augmented by articles, forms or other visual aids but should always have a “Q&A” component. Here are some ideas:

I. Basic Organizational Structure

The Association's basic organization structure and the parameters of its rights and duties and those of its directors and members are found in the governing documents, the Davis-Stirling Common Interest Development Act, the California Corporations Code and miscellaneous other state and federal laws (like those dealing with discrimination, satellites or bankruptcy). Other applicable authorities include case law decisions, easements, development agreements or other land use restrictions.

Which Controls – the Governing Documents or the Law?

This is among the most common questions we're asked, especially because our state laws address so many transactions and issues affecting California homeowner associations (or “CIDs” for “Common Interest Developments”). The answer is “it depends” on whether the legislature feels so strongly about an issue that it decides the applicable law will (or won't) “trump” the governing documents. Here are some examples in our Civil Code (and note the emphasized wording that reveals the legislature's intent to override, or not):

Assessment increases: “Notwithstanding more restrictive limitations placed on the board by the governing documents, the board may not impose a regular assessment that is more than 20 percent greater” than that of the previous year (section 1366(b)).

Contents of budget to be distributed to the membership: “Unless the governing documents impose more stringent limitations, the association shall prepare and distribute … (a) proforma budget, which shall include…the estimated revenue and expenses on an accrual basis… (a) summary of the association's reserves… (a) statement as to…(whether) the board…has determined to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less…” (section 1365(a)).

Solar energy: “Any covenant…and any provision of a governing document…that effectively prohibits or restricts the installation or use of a solar energy system is void and unenforceable” (section 714).

Maintenance responsibility: “Unless otherwise provided in the declaration of a common interest development, the association is responsible for repairing…the common areas, other than the exclusive use common areas and the owner…is responsible for maintaining (their) separate interest…” (section 1364(a)).

You can see that when it comes to assessment increases and solar energy, California law dictates the rule: that the CC&Rs cannot take away the board's right to raise assessments 20% per year nor an owner's right to install most solar energy systems. On the other hand, the legislature has only set a “minimum bar” for the contents of the annual budget, and, when it comes to maintenance, simply establishes a “default” in the event the CC&Rs fail to specify who - the association or the owner - maintains components located on common area or “separate” interests. Thus, to know whether the law overrides the governing documents we first must identify the applicable law and study its language.

Which Controls - the Articles, Bylaws, CC&Rs or Rules?

Conflicts among these governing documents are less common than in the past. It used to be said that the CC&Rs prevailed over conflicting provisions in the governing documents because they were harder to amend (usually requiring a higher percentage of membership approval than for the other documents) and “ran with the land.” Modernly it is argued that “corporate” matters are controlled by the Bylaws while “property” issues are dictated by the CC&Rs. The rules do not prevail over conflicts in the other documents.

II. Fiduciary Duty, Indemnification and Insurance

The basic idea of “fiduciary duty” is that it sets a standard of behavior for those serving on the board. The standard requires directors to make decisions and to act in good faith and within the scope of their authority under their association's governing documents. This includes making decisions the director believes to be in the association's best interest (not the best interests of the director) and requires a director to ask questions (the duty of “reasonable inquiry”) before reaching conclusions what should reflect judgments of an “ordinarily prudent person.” The rule is easy to say but not always to analyze or implement. In a board orientation, the issue gets “teased out” by real world illustrations relating to such common questions as whether and to what extent a CC&R violation should be “prosecuted”; a defects claim should be further analyzed; or an election redone based on voting challenges.

The issue of fiduciary duty is tied to “indemnification” rights - that is, the right of a director to receive a legal defense and reimbursement for claims, demands and damages arising out of a director's service to the association. The applicable rules are surprisingly complicated but the point is that the association generally must protect those who volunteer (and other agents who act) on its behalf.

The issue of insurance is also related: the way in which the association protects itself from the cost of indemnifying directors or others is by maintaining insurance. Director claims are usually taken care of by comprehensive general liability (so called “CGL” coverage when the issues relate to personal injury or property damage) or directors and officers insurance (“D&O” when the claims are for economic loss, breach of fiduciary duty and the like). There are some very important timing questions for making claims under the typical D&O policy (requiring notice when a claim is first made) that often generate a lot of interest in a board orientation.

III. Board and Membership Decision Making

The law intends that board decisions shall be made at open, noticed and agendized board meetings. Exceptions exist for decisions made in executive session or by unanimous written consent. Again, these principles are easy to say but not always clear in their implementation. Topics that should be covered in a board orientation include:

• How specific must the agenda be
• Should architectural appeal hearings identify the owner's address
• Is action by consent appropriate
• Should member comment occur before, during or after the business meeting
• Is decision making by email permitted; is it permissible “written consent”
• Should the minutes be detailed; how detailed
• Is executive session limited to reasons stated in the Open Meeting Act

Generally, all authority vesting in the association is exercised by the board (Corporations Code section 7210). Exceptions are for the really big things an association does and these frequently require membership approval: mergers, annexations, large regular or special assessments, elections and recalls and governing document amendments. Most of these are subject to the homeowner association election laws that can be confusing even when, as is common, they conflict with the election procedures contained in the association's own CC&Rs and Bylaws. Good discussion topics include:

• The validity of election by acclamation
• The recall/re-election process
• Campaign communications
• Voting extensions, disqualifications and “member in good standing” questions

Voting issues may only arise once a year but how a board implements a vote is one of the most visible things it does. Thus, the tone of the vote and its components should be established by a board which in turn requires some basic knowledge of the applicable procedures.

IV. Defective Building Conditions and THE Right to Bring Claims

Building defects continue to remain an important concern for directors. Newer CC&Rs contain significant limitations on an association's right to bring claims if the timing and procedures are not properly followed. Follow this link for a summary of standards and deadlines:http://www.berding-weil.net/pdf/residential-construction-and-outside-time-limits.pdf. Whether the cost of repairs (and the “reasonable inquiry” required to determine that) warrants pursuing claims is a related topic that generates a lot of discussion in meetings with a board. Educating directors on the ins and outs of this can be among the most important feature of an orientation for projects with potential claims.

Summary

There are lots of other subjects that could and should be included in an orientation. These include architectural control issues (approvals, denials, appeals, clarity of rules); CC&R enforcement (fines, “meet and confers,” mediation, arbitration, litigation, appeals); disclosures (when, how often, what, in what form) and generally how best to communicate to the members. The key in any orientation is not to “wow” the board with all there is to know but rather to help directors recognize the frame in which they operate, the general duties they have to “do the people's work” and how to best maintain the trust of the membership so things can get done.