Court Exonerates Board Member in Multi-Million Dollar Claim

Kulik Gottesman Siegel & Ware LLP (“KGSW”) is pleased to announce that Thomas M. Ware II and Justin Nash successfully defended Erna Parth, a former homeowners’ association volunteer director and President, against a multi-million dollar damage breach of fiduciary duty claim brought against her by her own homeowners association.  After a 25 day bench trial, and over six years of highly contested litigation, judgment in favor of Ms. Parth was entered on December 14, 2018.

This action arose out of plaintiff Desert Protection Security Service’s April 11, 2012 filing of a complaint against the Palm Springs Villas II Homeowners Association (“Association”) for breach of contract.   Desert Protection Security Service (“DPSS”) asserted that it was entitled to recover damages based on the Association’s alleged improper early termination of a one- year security services contract extension signed by Ms. Parth as Association President.  

The Association filed a cross-complaint seeking indemnity from Ms. Parth claiming that the Board of Directors had not properly authorized Ms. Parth to execute the contract extension on its behalf.   Although the Association ultimately settled the complaint with DPSS in exchange for $12,500, the Association’s  cross-complaint included a breach of fiduciary duty cause of action against Ms. Parth seeking  damages arising from: (1) alleged construction defects arising from the 2005 hiring of a roofing contractor; (2) finance charges arising out of Ms. Parth’s execution of loan documents for three separate construction loans (two in 2007, one in 2010) used to make common area repairs but allegedly obtained without membership approval; (3) alleged overpayments to the Association’s landscaping contractor; (4) the alleged early termination of a former property manager; and (5) execution of the DPSS security contract.  Prior to trial, Association asserted that its damages exceeded $4.5 million.

At trial, the Association requested $1,933,025.78 in damages against Ms. Parth.  The trial court rejected each and every one of the Association’s damage claims.  Instead, the Court found that Ms. Parth was protected by the business judgment rule and exculpatory clauses in the CC&Rs and Bylaws as she acted in good faith and exercised reasonable diligence with the care of an ordinarily prudent homeowners’  association director in like circumstances.  The Court also found that Ms. Parth was not the legal cause of most of the Association’s claimed damages.  Most of her conduct was performed with the knowledge, consent and approval of the Association’s five member Board of Directors.  In addition, many of the claims were barred by the statute of limitations as they occurred more than four years prior to the filing of the cross-complaint in May 2012.  In any event, the Association failed to establish that it incurred any actual damages arising from Ms. Parth’s conduct.

For those interested in learning more details about the trial, an electronic copy of the Court’s statement of decision can be obtained by e-mailing either Thomas M. Ware II (tware@kgswlaw.com) or Justin Nash (jnash@kgswlaw.com). 

Court Holds Homeowners Association May Exclude A Member’s Representative From Board Meetings

A new opinion published on June 20, 2013, holds that a homeowners association may exclude an owner’s representative from a board meeting because the representative was not “member” as defined by the association’s governing documents. In SB Liberty, LLC v. Isle Verde Association, Inc., the homeowner formed a limited liability company (“SB Liberty”) to hold title to their single-family residence. Following a dispute with their homeowners association, the homeowners, via SB Liberty, executed a power of attorney to provide their attorney with the right to attend and participate at board meetings. Following the Association’s refusal to allow the attorney to attend a board meeting SB Liberty filed a lawsuit and sought a preliminary injunction to enjoin the association from preventing the attorney from attending board meetings. In its opinion, the California Court of Appeal found that the association’s governing documents provided that only members could attend board meetings, and that an attorney could not be considered a “member” within the meaning of the governing documents. Therefore, the Court of Appeal affirmed the trial court’s decision denying SB Liberty’s preliminary injunction motion.

Thou Shall Not E-Mail!

For better or worse, E-Mail has changed how common interest developments are governed. It has enabled more volunteer Board members to actively participate in the day to day operation of their common interest developments. Through the use of E-mail, Board members instantly can be apprised by their managing agents as to the status of construction, maintenance efforts, landscaping, homeowner complaints, and collection efforts. Rather than mailing opinion letters or litigation documents to the property manager for their submission to the Board at a later date, lawyers can E-mail such information to the Board members upon receipt.

The receipt of such transmissions can, and often does, provoke immediate thought and discussion among Board members regarding the information provided. Such discussion typically is helpful in promptly gathering information, addressing legal issues, developing strategies, settling disputes, and directing the conduct of Association’s attorneys, managing agents and vendors. Starting January 1, 2012, however, Board members may receive E-mail communications from their managing agents, vendors, and attorneys, but they will be unable to respond to each other regarding these communications

In response to complaints of “secret” Board meetings, the California legislature has passed a bill which if, as expected, is executed by Governor Brown will ban volunteer Directors from discussing, outside of a Board meeting, “any action within the authority of the board except those . . . validly delegated to any other person or persons, managing agent, officer of the association, or committee. . . .” Association, furthermore, is expressly barred from discussing business and making decisions via a series of electronic transmissions. The one exception to this rule is that a Board may conduct an emergency meeting via E-mail if “all” Board members consent to such a electronic conference. (The Directors’ written consents must be filed in the Association’s minutes.)

This E-mail ban may slow down and increase the cost of Association governance. It likely will necessitate more special executive session meetings to address issues that arise in between regularly scheduled meetings. Except for emergency meetings, the Association now must provide its members with at least two days prior notice of an executive session meeting. Unless the homeowner expressly consents to E-mail notice, the Association must bear the cost to provide notice of executive session meetings by mail or hand delivery. While members are not entitled to attend executive session meetings, they are now entitled under the new law to obtain copies of executive session agendas upon request.

While the bill authorizes homeowner Boards to conduct meetings telephonically, the Association still must give written notice of the meetings to the members, four days for open meetings and two days for executive session. If a Board decides to do so, the notice must specify the physical location of at least one participating director and permit the members to listen to, and participate in, the teleconference at that location.

Only time will tell if this statutory amendment will accomplish its stated goal of achieving governing “transparency.” Somehow, it seems doubtful that homeowners sending emails to their volunteer Board members demanding that mold in their unit be abated immediately will be happy to wait until the next Board meeting for the Board to discuss such a request. To the contrary, it is not difficult to imagine that in this litigation happy society a Director’s response that “I am legally prohibited from speaking with other Board members in the interim period,” will be answered with a summons and complaint. The Director then will be faced with the conundrum of what to do with the complaint if he cannot discuss it with his/her fellow directors.