Board members have a great deal of discretion in managing their association, but as one Board president recently discovered, that discretion does not permit a board member to unilaterally bind her association in contract. Generally, the common law “business judgment rule” affords a great deal of judicial deference to directors who act in good faith and in a manner in which they believe is in the best interests of the association. Yet, in Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268 (“Parth”), the court made clear the business judgment rule will not shield directors from personal liability for unilateral, uninformed decision-making.
In Parth, the defendant, former president of the board of Palm Springs Villas II Homeowners Association, Inc., made a series of extremely expensive contractual commitments on behalf of the association, including but not limited to incurring more than $1.19 million in roofing repair costs, signing promissory notes for $900,000 and $325,000 for repaving, among others, and unilaterally signing a one-year contract with automatic renewal for security services without the consent of her fellow directors.
The Parth court noted the evidence suggested the defendant made no effort to understand the extent of her authority as president and director of the association, and made clear that the business judgment rule does not “extend to such willful ignorance.” In short, the defendant’s conduct “raises serious questions as to [her] diligence….” Such failure to act diligently and in good faith, making reasonable inquiry when necessary, will prevent application of the business judgment rule to protect a director from liability.
For more information concerning this recent court ruling, the business judgment rule, and director liability and responsibility, contact Cari Ann Potts at firstname.lastname@example.org or (805) 644-7188.