Board Member Legal Orientation 2019

1. Board Member Legal Orientation2019 Susan Cendejas Brad Epstein Angius & Terry LLP bepstein@angius-terry.com

2. What Does Effective Mean? • Producing a decided, decisive, or desired effect • Ultimate effect: maintain, protect and enhance the value of the Association property • Initial effect: make decisions on the issues addressed in the meeting

3. Board Members should have a Separate Email Addressfor Association Business • Clearly delineate your association business from other parts of your life. • You will need to disclose emails upon subpoena in a lawsuit. • It might increase the professionalism of the email messages that you send.

4. Good Board Members Understand • TIME • COMMITMENT • PRIORITIES • COMPETENCY • TRUST • RESPONSIBILITY • POLICY MAKING • ADMINISTRATION CONFIDENTIALITY TEAM WORK

5. Board Members’ Duty of Confidentiality • Executive session communications • Enforcement • Homeowner assessment delinquencies

6. Board members that disclose confidential information may adversely compromise the Association’s legal positions and may be liable. • Such board members may not be protected from liability by: • The safe harbor law. (Corp. Code 7231) • Director’s & Officer’s errors and omissions insurance.

7. Open Meeting Act The Davis-Stirling Act’s open meeting act requires boards to make their decisions in open meetings, except for executive sessions and emergency meetings.

8. Open Meeting Act • The board may adjourn to executive session for: • litigation • “matters relating to formation of contracts with third parties” • member discipline • personnel matters • payment plans

9. Open Meeting Act The board must adjourn to executive session: To discuss member discipline, if requested by the member who is the subject of the discussion. To discuss an assessment payment plan. To decide whether to foreclose on an assessment lien.

10. Emergency Board Meetings(Civil Code Section 4923) • Notice of meetings need not be given for emergency meetings. • Emergency meetings may be held for: (1) circumstances that could not have been reasonably foreseen; (2) which require immediate attention and possible action by the board; and (3) which of necessity make it impracticable to provide the required notice.

11. Emergency Board Meetings(Civil Code Section 4923) • May be called by president or by any two board members • Notice to members and agenda is not necessary • Emergency meetings may be held: • In person • Via email • If all members consent in writing • Written consents must be filed with the minutes • Telephone or video conference

12. May boards discuss or make decisions about association business by email? • No, unless: • Less than a quorum of board members are communicating, or • The board has delegated to someone other than the board (e.g., less than a quorum of board members) to make decisions about the matter, or • There is an emergency, and the board members unanimously agree to make the decision by email.

13. Board members may take action only if they have the Board’s authorization • Board members that take action without the Board’s authorization may not be protected from liability by: • The safe harbor law. (Corp. Code 7231) • Director’s & Officer’s errors and omissions insurance.

14. Good Board Members are Motivated by VISION………………….………notTasks MOMENTUM…..……..not Stagnation ACCOMPLISHMENT…...notMuddling

15. Board Member Self-Assessment • Do I see myself as a part of a board team? • Is my organization’s mission statement a uniting factor for our corporate decision making? • Do I share with the board and staff members a common vision for our future? • What are my motives for being on the board? Do I have a personal agenda that is not shared by the board? • Do I respect the skills, abilities, and gifts that other members bring to the board table?

16. Should the Board Members sign a Code of Conduct? • A code of conduct is an affirmation to comply with the law, governing documents, and proper decorum. • Some code of conduct provisions: • No disclosing confidential information. • Attend meetings, review materials before the meetings. • No self-dealing: decisions that materially benefit themselves. • No giving direction to vendors without board authority. • Act courteous.

17. What if a Board Member violates the Code of Conduct? • First, investigate the allegation. • Second, impose discipline: • Censure. • Remove from committees. • Remove from officership. • Request resignation. • Recall by membership. • Legal proceedings.

18. Are my listening skills focused on the issues, not personalities? • Do I trust management and other board members enough to ask hard questions, challenge, disagree, and engage in constructive debate? • Does my preparation for board meetings enable me to participate and contribute effectively? • When was the last time I participated with my board in educational or team-building activities? • Are my listening skills focused on the issues, not personalities?

19. Board members should not take action that exposes the association and its management to liability for discrimination. • Such board members may not be protected from liability by: • The safe harbor law. (Corp. Code 7231) • Director’s & Officer’s errors and omissions insurance. • Insurer’s duty to defend v. Liability coverage

20. Disciplinary Hearings • Notice • 10 days before hearing • Must contain, date, time, and place of meeting, description of violation, and statement that member may attend and address the Board • Delivered by U.S. Mail or personal delivery • Hearing • In executive session if requested by member, but executive session is usually preferred by boards • May review evidence and interview witnesses • Attorneys may attend • Decision • In writing within 15 days of hearing • Delivered by mail or personal delivery

21. Enforcement Actions • Actions the Board may take after hearing: • Impose fines • Suspend members’ access to common area facilities • Suspend member’s right to vote or to be a Board member • Impose, record, and foreclose on, Special Individual Assessment for costs incurred by association if the CC&Rs so authorize • Additional actions (for failure to cure violation or repeated violation): • Request for resolution – mediate dispute • Lawsuit to enforce governing documents

22. Internal Dispute Resolution v. Alternative Dispute Resolution • Internal dispute resolution • Meet & Confer • Alternative dispute resolution (Request for Resolution) • Mediation

23. Internal Dispute Resolution Internal dispute resolution • Informal proceeding conducted by board usually with assistance of manager • Often does not involve attorneys • No third-party mediator or arbitrator • Usually takes 30 days • No cost to parties • Association required to participate if requested by owner • Owner not required to participate if requested by association

24. Alternative Dispute Resolution Alternative dispute resolution (Request for Resolution) • Informal to semi-formal proceeding • Usually involves attorneys • Involves third-party mediator or arbitrator • Supposed to take 90 days but may take longer • Costs shared by parties (arbitrator/mediator paid per hour) • If unsuccessful may escalate to litigation • It is a prerequisite for the Association to file a lawsuit for injunctive relief and damages less than $5,000

25. 2019 law: AB 2912Board’s review of financials, transfer of funds, and fidelity bond coverage • “Unless the governing documents impose more stringent standards, the board shall do all of the following: • (a) Review, on a monthly basis, a current reconciliation of the association's operating accounts. • (b) Review, on a monthly basis, a current reconciliation of the association's reserve accounts. • (c) Review, on a monthly basis, the current year's actual operating revenues and expenses compared to the current year's budget. • (d) Review, on a monthly basis, the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts. • (e) Review, on a monthly basis, an income and expense statement for the association's operating and reserve accounts. • (f) Review, on a monthly basis, the check register, monthly general ledger, and delinquent assessment receivable reports.”  (Civil Code Section 5500)

26. 2019 law: AB 2912Board’s review of financials, transfer of funds, and fidelity bond coverage • “The review requirements of Section 5500 may be met when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member, reviews the documents and statements described in Section 5500 independent of a board meeting, so long as the review is ratified at the board meeting subsequent to the review and that ratification is reflected in the minutes of that meeting.”  (Civil Code Section 5501)

27. 2019 law: AB 2912Board’s review of financials, transfer of funds, and fidelity bond coverage • “Notwithstanding any other law, transfers of greater than ten thousand dollars ($10,000) or 5 percent of an association's total combine reserve and operating account deposits, whichever is lower, shall not be authorized from the association's reserve or operating accounts without prior written board approval. This section shall apply in addition to any other applicable requirements of this part.”  (Civil Code Section 5502)

28. 2019 law: AB 2912Board’s review of financials, transfer of funds, and fidelity bond coverage • “Unless the governing documents require greater coverage amounts, the association shall maintain fidelity bond coverage for its directors, officers, and employees in an amount that is equal to or more than the combined amount of the reserves of the association and total assessments for three months. The association's fidelity bond shall also include computer fraud and funds transfer fraud. If the association uses a managing agent or management company, the association's fidelity bond coverage shall additionally include dishonest acts by that person or entity and its employees.”  (Civil Code Section 5806)

29. THE ASSOCIATION MUST BE RUN AS A CORPORATION

30. Directors have a fiduciary duty to the Association What is fiduciary duty? • Directors owe a duty of utmost good faith and fidelity to the association. • Corps. Code Section 7231

31. Three prongs of fiduciary duty • Directors must act in the best interest of the homeowners association as a whole. • Directors may not make decisions in order to purposely favor a member. • Directors must act as an ordinarily prudent person would act under similar circumstances. • Directors may not take unreasonable risks. • Director must act only after reasonable inquiry. • Directors may not act arbitrarily.

32. Reasonable Reliance on Experts A director shall be entitled to rely upon the advice of consultants which the director reasonably believes are competent.

33. Compliance with Fiduciary Duty Results in: • Avoiding liability • Good decisions • Adherence to the Business Judgment Rule!

34. Fiduciary Duty Court Case • A board member who fails to investigate companies with whom the member contracts, fails to ascertain the contracting requirements in the governing documents, and fails to confirm the member’s authority to act is not exercising reasonable diligence and is not entitled to the business judgment rule protection as a defense • A director cannot close his eyes to what is going on about him in the conduct of the business of the association and have it said that he is exercising business judgment. Palm Springs Villas II HOA v. Parth (2016)

35. Board practices

36. May boards discuss or make decisions about association business by email? • No, unless: • Less than a quorum of board members are communicating, or • The board has delegated to someone other than the board (e.g., less than a quorum of board members) to make decisions about the matter, or • There is an emergency, and the board members unanimously agree to make the decision by email.

37. May boards publicly post the names of delinquent homeowners? • No. • State law requires boards to maintain the confidentiality of delinquent owners. • Boards would risk liability for defamation. (libel and slander)

38. May boards prohibit owner’s attorneys from attending meetings? • Yes. • The Davis-Stirling Open Meeting Act provides that only members may attend and participate in open board meetings. • Boards are authorized to determine how to conduct their meetings and therefore have the power to exclude the owners’ attorneys. • (SB Liberty, LLC v. Isla Verde Association, Inc.)

39. Must boards allow members access to publications and common areas to voice their opposition to a proposed cc&r amendment? • Yes, when the board advocates in favor of the cc&r amendment. • (Wittenburg v. Beachwalk Homeowners Association)

40. May boards adopt election rules preventing relatives of board members or board candidates from being nominated to be board members? • Yes, because the rule: • 1. Is reasonable since it minimizes the possibility of a conflict of interest. • 2. Is not inconsistent with the governing documents, even though the bylaws provide that any member in good standing may be a board member. • 3. Promotes the ability of the board to impartially conduct the business affairs of the association. • (Friars Village Homeowners Association v. Hansing)

41. Will an association’s D&O insurance policy cover an owner’s injunctive relief claim? • Most association D&O insurance policies do not cover owners’ injunctive relief claims. • Typically, association D&O insurance policies cover only owners’ monetary relief claims. • (San Miguel Community Association v. State Farm General Insurance Co.)

42. If a board member is sued, then must the association pay to defend the board member or pay a judgment? • Yes, pursuant to State law and most governing documents, as long as the director complied with their fiduciary duty. • 1. Insurance. • 2. Civil Code Section 5800: Board members are not personally liable above insurance. • 3. Corps. Code Section 7237: Associations must defend and indemnify upon a vote of the board members or owners. • 4. Most governing documents reiterate these protections. • 5. Corps. Code Section 7231: Fiduciary duty.

43. Questions?Thank you for attending!