by Matt J. Malone, Esq.
A year and a half ago, we wrote about the rule of judicial deference. Briefly stated, this rule provides that a Board's decision about the best methods for maintaining and repairing common areas when made with reasonable investigation, good faith and with regard for the best interests of the association and its members will not be second-guessed by a court. That prior article explored two companion cases concerning judicial deference to illustrate what factors make it more or less likely that a court will defer a Board's decisions.
The Fourth District Court of Appeal the same court that issued the earlier two rulings recently revisited the rule of judicial deference in the case of Affan v. Portofino Cove Homeowners Ass'n (2010) 189 Cal. App.3d 930. With this very recent case now decided, and given the many questions we receive on this issue, in this article we will revisit the prior discussion of the origin of judicial deference and the two cases from 2008 which analyzed its application. We will then scrutinize the impact of Affan on that analysis, and provide a brief primer for both Boards and managers as to the criteria that aid a court in determining whether it will defer to a Board's expertise.
The Origin of "Judicial Deference": The Lamden Case
California law offers a limited protection to homeowner Boards of Directors: the rule of judicial deference. Arising from the 1999 California Supreme Court case of Lamden v. La Jolla Shores Clubdominium HOA (1999) 21 Cal.4th 249, this rule states that when a Board acts in good faith and in the best interests of its members in making discretionary decisions concerning its obligations, a court will defer to that judgment and not second-guess the Board's decision-making.
The doctrine of judicial deference as applied to the Board of Directors of a homeowners association originates in a legal concept known as the business judgment rule. This rule holds that management decisions made in good faith in what the corporation's directors believe to be the corporation's best interest will not be second-guessed by the court. In short, the rule prohibits the court from playing the proverbial Monday-morning quarterback and interposing its own judgment for that of the directors.
Can an association's board of directors ever approve a transaction that would financially benefit a director?
Association boards often avoid interested director transactions because they can be politically divisive. This may be a very prudent approach. However, there is no absolute prohibition in the California Corporations Code or the Davis-Stirling Common Interest Development Act against an association entering into contracts or transactions with directors who have a material financial interest in the arrangement or with any corporation, firm, or association in which a director has a material financial interest. To the contrary, each statute contemplates that such transactions might come up for consideration from time to time. To prevent misuse of this power, these statutes set parameters for such transactions.
The Davis-Stirling Act subjects interested director transactions to the requirements of California Corporations Code section 310. Generally, under this statute, a transaction is not void or voidable simply because it is between an interested director and an association provided that:
Be careful. In addition to these statutory requirements, a board must ensure that the association's governing documents do not prohibit such transactions. And of course, each director must comply with his/her fiduciary obligations to the association and its members at all times.
Be proactive. An association can adopt guidelines to address this issue. An association may choose to completely prohibit such transactions or, instead, to adopt a policy that outlines the minimum requirements and procedures for approval of such transactions. Your association's general counsel can assist with the development of such guidelines if the board wishes to adopt them.
DIRECTORS GONE WILD!
By Steve Weil
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