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The Business Judgement Rule | Older Condo Legal Issues | Association Reserves - YouTube
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(soft music)
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- Hello and welcome to our bonus content
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following up on our Older Condos Webinar.
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We're fortunate today to
have with us Adrian Adams
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of Adam-Sterling Law Firm,
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we're gonna follow up
with the legal questions.
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We had many questions
following that webinar,
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and we've got some precious
expertise here with Adrian,
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and he's gonna be able
to share some insights
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to help fill in the blanks
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and bridge a little information
gaps that you may have
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after that webinar.
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So let's start with Adrian,
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a question about the
business judgment rule.
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Isn't that basically the framework
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by which board member questions
are going to be measured?
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- Yes, board actions, it
provides a layer of protection,
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so that board members
have no personal liability
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for the decisions they make,
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even if they make a
mistake in their decision,
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and the decision results in a loss
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that's against the association
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and the judgment against the association,
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the directors are not personally liable,
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if they follow the business judgment rule,
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and there are three elements to the rule.
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Their decisions have to be in good faith,
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in the best interest of the association
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and after reasonable inquiry.
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So if those three elements are met,
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the directors are not going
to face any personal liability
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in decisions that they make.
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And the three elements are,
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the first is probably the
most difficult proportion
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to understand what does
that mean, in good faith.
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- Good faith, yeah.
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- And the second two,
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in the best interest of the association
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and reasonable inquiry are
pretty straightforward.
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Are you doing something that
you think is the right thing
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for the association, that's
the best interest part,
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and reasonable inquiry
means you ask questions.
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And so you seek information, you get bids,
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you go through the process
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and trying to arrive at
a reasonable decision
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on behalf of the association.
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So what does it mean to make
the decision in good faith?
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Well, here's a real life
example of a board that did not.
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This followed the '94
Northridge earthquake.
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They had to rebuild their condominium,
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there was a great deal
of damage obviously.
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Prior board had hired a contractor,
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had gone through the whole process.
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Contractor was in doing work.
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A new election was held,
new board went in place
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and the board president said
to his fellow directors,
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"I think we can get a better deal,
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we can get it done cheaper."
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And so they discussed in executive session
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how they might drive out
the existing contractor.
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Okay, so you've got the three elements,
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good faith, best interests.
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Okay, the best interest is the association
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to get a less expensive contractor?
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Sure, did they do the reasonable inquiry?
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Yeah, they checked around
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and found out they could do it cheaper.
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Okay, so those two elements they met.
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Good faith, they didn't,
you can't drive out,
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you can't breach contract
with an existing contractor
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and force him off the job,
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in order to satisfy the other two elements
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of the business judgment rule.
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- So the three things kinda work together
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what is it triangulate?
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- Yes, in fact, it's like
a three-legged stool,
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you pull out one of the legs,
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the stool is gonna fall over.
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And in this case it did
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because they recorded all
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of their executive session discussions
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and how they were gonna force
out the existing contractor.
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And they got sued, it
was all discoverable,
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all came to this purpose and
a judgment was against them
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because of that good faith
element, they breached that.
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So those three elements were all crucial.
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If a board is going to move forward
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and be protected in their
decision making process.
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So their decisions in good faith,
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the best interests of the association,
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and after reasonable inquiry.
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- Is there a limit to the
size of those decisions
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or are those day-to-day decisions
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that you might have as a board member
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about almost trivial things?
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If the grass is cut twice
a week or once a week,
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or if the pool service
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is also going to do some like
janitorial around the pool,
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where does it stop or does it stop?
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- Yeah, basically all
decisions should be made
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with those three elements.
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And it's pretty common sense,
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do we cut grass twice a
week versus once a week?
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Well, what's the budget,
what can the budget take,
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and what impact will it have
if we cut only once a week
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versus twice week?
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And reasonable inquiry
in making the decisions.
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So it should be just like natural
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that you're conducting all business
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using those three elements.
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- So that's kind of in
the back of your mind,
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and that's your framework for addressing
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the business at hand at the association?
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- Yes.
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- Okay, so what I hear you
saying is no winging it
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just on personal preference.
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- Yeah, well, with trivial
things reasonable inquiry,
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then the question comes up,
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do you have to get three bids
on every single thing you do?
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No, there are gonna be
something that they're so small
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that you can't even get three bids.
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So you've got a small project,
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you've got a plumber you've been using
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you just tell them to go fix it.
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So that element of it, what
would be the reasonable inquiry?
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Does it need a plumber to make the repair?
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Yes, we did the inquiry,
we need to get the plumber,
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we've got a plumber, we
just tell them to go fix it.
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Okay, now it's a big job,
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it's gonna cost you a hundred
thousand dollars to repair.
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Okay, now you're all getting bids.
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And so it's just common sense prevails
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on those kinds of things,
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but you're still using all
three elements, good faith,
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best interest of the
association, reasonable inquiry.
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- Yeah, so it sounds like those three,
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again, continue to work together,
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they may have different manifestations.
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Like you say, if the pool pump just fails,
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you go out for three days,
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you just tell the pool service company,
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well, buy a new one and put it
in, what are you waiting for?
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- But the manifestation is different.
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If it's a hundred thousand
dollars elevator remodel
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or a roof replacement,
then all of a sudden.
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- The reasonable inquiry
becomes a bit more,
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it shifts a little bit.
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- Got it, okay.
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- You still have to do it,
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but it becomes a little more involved.
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- Yeah, how are those
decisions documented?
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You said you had one client
or you knew of a property
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where they recorded executive session.
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And that started to make the hair
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on the back of my head go up.
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Recording things should be private, but.
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- Yeah, they did audio recordings
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and kept all the recordings.
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But normally you're keeping track,
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you're recording your decision
process in the minutes.
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So that's how it gets
documented in the minutes.
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And that is where they're
supposed to be documented,
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it shows what the board,
'cause you're recording,
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the business activity of the
association for directors.
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- Yeah, what happened,
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there's probably not a lot of background,
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you don't necessarily need
to provide a lot of the why,
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but it's a good stepping
stone of we chose this,
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we chose this, we vote, we
approve those kinds of things.
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- And what boards also
failed to understand
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is that another form of documentations
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to frequently taking place
and that's their emails,
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and they're exchanging emails,
they're discussing things.
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Sometimes it's a good things
and sometimes not good things.
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And if litigation erupts,
their emails get subpoenaed.
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And so it's a part of
the discovery process,
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and what they say in those emails
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sometimes can be really good,
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it shows that they were
really being diligent about
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trying to find what they're
supposed to be doing.
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Although it's also a violation
of the open meeting act,
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at least in California,
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they're not supposed to be
conducting business by emails,
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but it also can come back to bite them.
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And I had another example association.
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There was a back up water,
backed up from the sink
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into a man's brand new hardwood floors
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while he was out for the weekend,
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came back in three days
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of water sitting on the hardwood floors,
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complete destroyed floors.
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The board exchanged
emails about his demand
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that the association replaced them.
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And the president wrote in an email,
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"I know we are responsible,
we are liable for this,
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but he can go to hell
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before I'll give one
dime to fix his floors.
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Okay, well, I was called
as an expert on the case,
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read the emails, I was like,
"Oh, man we got a problem."
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But the first thing was I evaluated
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it wasn't the association
fault, they weren't responsible,
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they weren't liable for what happened.
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So normally he would
turn over his insurance,
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association turns over
theirs to fix common areas,
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he fixes his hardwood floors.
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The problem was because of that one email,
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the insurance company said,
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"There's no way we can take
this to front of the jury,
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we're gonna get hammered."
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And so they settled and paid
for the guy's hardwood floors,
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even though association
was not responsible.
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So boards need to be very
careful about documentation,
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and they should stay off of the emails,
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they are least in California,
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not even supposed to be
communicating and making decisions,
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discussing, and making decisions by email.
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I don't know about other states
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what their laws are on
these kinds of issues,
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but it's kind of common sense.
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And I can tell you in any state,
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if there's communications going on,
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they're gonna get pulled
in through discovery.
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And what they say is
going to be put up, blown,
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just imagine being
blown up on a big screen
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in front of a jury,
your words in an email.
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So if that's your guiding principle
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and you keep that in mind,
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it will help save a lot
of grief for director.
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- Yeah, so there's documentation
in the meeting minutes,
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there's lack of documentation
in the meeting minutes, right?
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And lack of meeting minutes,
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and then in the absence of that,
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then there will be attorneys searching
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for any other documentation
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and that can involve
emails as you suggest.
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- Right, and sometimes
the lack of documentation
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is a problem.
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In cases I've dealt with,
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we're looking for
particular set of minutes
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where a decision was made
and they don't exist.
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And sometimes that's a problem.
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- Yeah, when past a special assessment,
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or as you suggested earlier
chose in a board motion
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to hire a contractor.
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And that business activity.
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- All that needs to be documented.
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And I like to have a little
bit of information in,
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not just what board voted
for something, but why,
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why did they do it?
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Why did they choose?
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Because they don't have to choose low bid.
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And sometimes the mid bid or
the high bid is the best bit.
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And there's not that much
difference between them,
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but you've got the high bid
is a more experienced company
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with more insurance, more personnel,
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they can get it done faster,
they have good references.
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So why did you pick the high bid?
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It's okay to say that in a minute.
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It helps to document their
decision that they were doing,
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good faith, best interests
of the association
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and reasonable inquiry.
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So it's a documentation for that.
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- Very good, in the webinar
that we did with Julie Adamen,
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she talked about the four Cs
of effective communication.
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Again, the framework
in her management world
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that she thinks of when measuring
how effective a board is.
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And she talked about boards need to care,
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about the association.
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They need to be curious, what is going on?
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Can we plant those kinds
of flowers out front,
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and then courageous,
once they make a decision
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having the courage to move forward,
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and then the fourth is communication,
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communicating effectively
to try to keep the board
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on the same page as the owners.
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And it sounds like a lot of that
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is what you were talking about.
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Caring, which means caring
for the association first.
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- In their best interest,
curiosity would be the inquiry,
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the urge to make the
decision and communications
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is also part of it because we see boards
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that are afraid to raise dues
or impose special assessment
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when they need to do that,
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because it's in the best
interest of the association
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to maintain the common areas.
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In fact, knowledge of the best
interest is the requirement.
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That's what they're by law required to do
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and per their governing documents.
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So that's why they're elected.
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And sometimes you have misguided boards
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that think it's the best
interest of the association
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to keep the dues down, never
raised them for 10 or 15 years.
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And that comes back to in a serious way,
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in large, special assessments,
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significant deferred maintenance
that sometimes lawsuits
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and it's harmful to the membership
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to be put in that position.
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- Yeah, well, to me that sounds
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like it is not in the best interest
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of the association.
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It may be in the best
interest of Mrs. Johnson
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who's on a fixed income in unit number 13,
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but the board is responsible
for what's in the best interest
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of the association.
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- Yeah, and I can tell you that,
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and when I say that they think
it's in the best interests
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because of fixed income I
had an association exactly
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in that position,
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where I was brought in
after they got sued.
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And the reason they got sued
is Ford had for 10 or 12 years,
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kept the dues fixed because
they had a lot of fixed owners
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living in the building.
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And so compassionate
for those fixed income,
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older residents, they
didn't raise dues at all,
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but that meant they
didn't make any repairs.
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They deferred, deferred,
deferred, deferred,
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and they didn't put any
money into reserves.
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And what happened
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was that finally
everything started failing,
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and he started in a
big way with the roofs,
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and on those rare occasions
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when it actually rains in California,
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water poured in on virtually every unit.
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One of the things about California
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is you can go for years with no real rain
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and then when it does
rain, it rains a lot.
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So you don't know that
certainly you've got the leaks
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until it's too late and
you've got downpours,
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and water is pouring in, into units
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throughout the complex.
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And of course they didn't
have any money to fix anything
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and lawsuits started flying.
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The other part of it, the
compassion Ford that they felt
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for the fixed income owners.
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Now these owners, they're getting hit
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with big special assessments
to make a lot of repairs
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and to fight lawsuits, to settle lawsuits.
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And these owners they can't
pay these special assessments
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and they don't have time
to find anywhere to go,
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they end up having to walk
away from their units.
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Whereas if had been small
incremental increases each year
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to keep up with inflation, to
do what the needs to be done,
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they could have made a reasonable decision
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'cause seen, okay, next couple of years,
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I'm not gonna be able to
afford to live here anymore,
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but it gives them time
to actually make plans.
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They can look to see, okay,
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I need to move to where it's
cheaper, it's less expensive,
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and I can afford it.
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But when they're faced with
huge special assessments
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and tons of litigation,
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and the other part about the litigation
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is even if they try to sell their unit,
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if it's in the middle of litigation,
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it drives down on the cost.
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People don't wanna buy
in to an association
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that's poorly maintained
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and is in the middle of litigation.
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And so you can't find buyers,
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and if you can't find a buyer
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the market value just plummeted.
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So it's the worst possible
situation for those individuals
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that have been on fixed income
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that you think you've been
protecting all these years.
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(soft music)
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- Yeah, Adrian, that's great.
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We asked for a clarification
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and for you to fill out the questions
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that he had about the
business judgment rule.
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And I got here, good faith,
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best interest of the association,
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and after reasonable inquiry,
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sounds like that's the litmus test
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for what boards need to be doing.
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- Yeah, as long as they follow that,
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not only are they going to be objective,
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but it's in the best
interest of your association,
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so that you'll protect the association
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from large special
assessments and lawsuits.
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(soft music)
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