Hire or fire an HOA an Attorney in 2025?
Hire or fire an HOA an Attorney in 2025?
? Alan Schantz HOA litigation and rebuttal expert witness
?HOA Directors have fiduciary responsibilities
Directors of Homeowner’s Associations (HOAs) have fiduciary duties to the HOA and its members. Decisions made by HOA Directors have consequences. Their decisions and actions may have protection under the ‘business judgment rule’ defined thus: “Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.” In other words, courts tend to not second guess decisions made by HOA Directors.
?HOA Directors have legal protections
Applying the ‘business judgement rule’ Courts have adopted a policy of judicial deference to community association board decision-making that applies, regardless of an association’s corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations’ boards of directors. Many HOAs and their Directors have come to believe that the ‘business judgement rule’ gives them blanket immunity from liability for their decisions as Directors.
?Directors decisions are also protected when acting upon advice provided by experts such as CPAs, Attorneys, and other recognized professionals in a given field. This is because HOA Directors are not expected to have the level of knowledge of qualified professionals in various professions.?
?For example, Stated in the California Corporations Code, Section 7231(a) is the guiding principle for a director in carrying out his or her obligations.
?First, it requires a director to act “in good faith”, which means that the action of each director must be genuinely directed towards those purposes set forth in the governing documents. There should be no ulterior reasons or motives.
?Secondly, each director must act in a manner that the director believes to be “in the best interest of the corporation.”
?Finally, and perhaps most importantly, a director must act with the care of an ordinary prudent person, including the?duty?of “reasonable inquiry.” This means that a director is obligated to investigate each and every situation sufficiently before acting, and once the director does act, he or she must do so in a non-negligent, prudent manner.?
?Section 7231(b) outlines the various types of information upon which a director is entitled to rely and which form at least a basis for a defense to a claim of breach of fiduciary duty. Obviously, the drafters of this section recognized that each director cannot be an expert in all aspects of a nonprofit corporation, particularly those areas which require substantial training, such as law, construction and accounting.
?This subsection further recognizes that each director cannot, in all probability, investigate each and every issue with the appropriate thoroughness to reach an independent judgment. It is certainly for that reason that the statute permits a director to rely upon other offices and employees of the corporation whom the director believes to be reliable and competent in the matters presented.
?Although subsection (b) permits a director to rely upon the information, opinions, reports and statements of others, it does not absolve him or her responsibility to make reasonable inquiry and to use reasonable care to assure that the information, reports, opinions and statements are being provided by individuals competent in the matters being provided.
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?Section 7231(c) makes it clear that if a director follows the principles of subsections (a)?and?(b), no liability shall attach based upon any alleged failure to discharge that person’s obligation as a director. This is so even if the ultimate action or decision of the director or the board of directors is incorrect. Stated simply, a director may be wrong in his or her ultimate decision, but that director is only liable if he or she has failed to follow the obligations and principles of subsections (a) and (b).
?What happens if an HOA employs an attorney that is not experienced with HOA issues and laws, in other words an unqualified professional, and relies on that unqualified persons advice?
?A Google search turns up the following: ”If an HOA fails to hire an attorney experienced with homeowner associations, they risk significant legal complications, including?costly lawsuits, improper enforcement of community rules, potential breaches of fiduciary duty, and mismanagement of funds due to a lack of understanding of complex HOA laws, potentially leading to disputes with homeowners that could damage the community's overall value and stability.”
?Should your HOA fire its attorney?
Employing an unqualified attorney can have disastrous results for an HOA and its Directors. Individual Directors may be held personally liable for their decisions and their actions may not be covered by the HOAs insurance carrier. This may expose HOA and its Directors acting as individuals to uninsured personal liability that can ruin them financially.
?The bottom line
Make certain that your HOA employs an experienced attorney who is thoroughly knowledgeable with HOA laws and legal decisions impacting decisions of your board of directors. Experience and expertise in HOA law and matters is a prerequisite for any attorney whose legal advice your HOA and its Directors follows. At your next Board business meeting your directors should affirm that the attorney whose legal advice they act upon is qualified, experienced and knowledgeable in HOA matters and law. Your board of Directors should enter into their meeting minutes a decision to retain or fire the HOAs legal counsel based upon their qualifications.
?HOA Directors may delegate the authority to enforce HOA rules and run the day to day operations of the HOA. However, Directors may not delegate their responsibility to operate the HOA in compliance with the governing documents, law and regulations regarding HOAs. The buck stops with the Board of Directors. Likewise, Directors must ensure that the Attorney representing the HOA is competent and qualified to do so.
?? January 6, 2025 Alan Schantz HOA litigation expert witness - www.hoadvd.com
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