By: Sharon Glenn Pratt
No CID wants to be sued, and in the event that a board is faced with defending a lawsuit, it of course wants to be found not liable for whatever is being alleged.
One of the best ways to avoid litigation is for the board to encourage transparency and to steer clear of suggestions of impropriety. The other is to recognize possible conflicts before they get to a point of such contentiousness that a lawsuit ensues. Conflicts can be resolved via an alternative dispute resolution procedure. While boards should not cave in to false accusations, it is always wise to avoid litigation. Here are what I have identified as the “top five” pitfalls for boards to avoid.
Deviating from Governing Documents
If your CID has an up-to-date, comprehensive set of governing documents, then those CC&Rs, Bylaws, Articles and Rules, etc. provide the “roadmap” for the board to follow. A good board should never disregard the language in its governing documents. In instances where the governing documents do not reflect “the way we’ve always done things” or the as-built condition of a project, it is incumbent upon the board to either start the process for amending the governing document to match the current reality (as long as it complies with the law) or to correct the activity that is contrary to the governing documents. The board has a duty to enforce the governing documents. This includes reasonable investigation, and acting in good faith with regard for the best interests of the community association and its members. Know your governing documents, and consult them often.
Conflicts of Interest/Self-Dealing
Some of the examples of conflicts of interest are blatant. The board votes to waive its own assessment payments in exchange for services provided as officers of the corporation. The president uses her clout to get extra landscaping for her own front yard. Other conflicts are less obvious, such as a director’s relative being hired to perform a service. To avoid impropriety, a director should both disclose the conflict and abstain from voting on contracts or transactions from which he or she stands to benefit. Although abstention is not always mandatory under Davis-Stirling, in cases where the interested director has a material financial interest and the conflict is not disclosed, the contract or other transaction may be void or voidable.
Ignorance of the Law
The old adage that ignorance of the law is no excuse particularly applies to boards. One of the duties of the board is to seek proper expert advice so that it is knowledgeable about the applicable law before it makes a decision. For example, if a board unknowingly violates the law on fair housing by enacting a rule that discriminates against children, it has exposed the association to liability for substantial damages and attorney’s fees. While directors are not expected to be law professors, they are expected to get adequate legal advice before exercising their business judgment.
Violations of the Open Meeting Act
Violating the Open Meeting Law by making decisions via email, or behind closed doors, or without proper notice is such a frequent and pervasive problem that it deserves separate mention. What motivates a board to flaunt the law in this regard? It may be an effort to accomplish things more quickly via email or to reach out of town directors via email. It may be that the directors have no idea that only subjects listed under CC §4935 may be covered in executive sessions. Again, ignorance of the law is not an excuse. The purpose behind the open meeting law is very important — to allow the owners to attend, observe, and participate in the corporate governance of their own association.
Directors may believe that the owners are not interested because nobody shows up for board meetings. Unfortunately low attendance is not a defense to a violation of the open meeting statutes. Boards should avoid any emails that are sent to a quorum of directors, because simply hitting “reply all” can turn the email into an illegal meeting. Meeting via email is allowed only in emergencies. Agendas for board meetings should cover everything to be discussed and voted on by the board, and they must be posted at least four (4) days prior to the meeting, with the notice of time and place. Remember the words of the CID Open Meeting Act: “The board shall not take action on any item of business outside of a board meeting.”
Mismanaging the Money
One of the most damaging things a board can do is to mismanage the money of the CID.
There are multiple statutory restrictions on the treasury of a CID, from budget reporting to the reserve funding plan to the disclosures of insurance, loans, and accounts. Unless governing documents impose more stringent standards, a financial statement should be prepared and distributed annually to members. There are also strict requirements on keeping the association’s funds in federally insured financial institutions. With regard to reserve funds, directors may vote to borrow money from reserves for certain purposes, but must repay the reserve account within one year. Funds should not be comingled.
The fiduciary duty that directors owe to the association includes protecting the assets of the corporation, which of course includes its accounts. This is an area where the treasurer and all of the officers must be very well versed on everything that the law requires, and always vigilant in knowing how the money is managed.
About the Author:
Sharon Glenn Pratt is the managing attorney of Pratt & Associates in San Jose, California. She is a specialist in common interest development law and litigation, and has been practicing in the San Jose area for 29 years.
She can be reached at