Time for another article that answers a frequent HOA question.
The Trump versus Clinton campaign had nothing on HOA battles. Potential clients call or email wanting to sue their HOA Board members because they don’t like the flowers they planted in the common areas. They believe that every decision must be put to a vote. They are convinced that the board members are all pocketing money and favoring themselves over the other members. Often the caller’s frustration comes from the fact that the Board, or an individual board member, is making unauthorized expenditures.
Can I sue my HOA?
So the ultimate question is, can a member sue the HOA and/or Board Members for overreaching and self-dealing? To answer that broad question, let’s create a typical scenario and then analyze it.
In our hypothetical, you are a free spirit, and every morning you sing the theme song of your life, Signs by Five Man Electrical Band, which includes the lyric:
And the sign said anybody caught trespassin’, will be shot on sight.
So I jumped on the fence and-a yelled at the house,
“Hey! What gives you the right?”
“To put up a fence to keep me out or to keep mother nature in.”
“If God was here he’d tell you to your face, Man, you’re some kinda sinner!”
You are therefore shocked and aghast when you see that your HOA put up a gate while you were on a cruise to Aruba, making your neighborhood one of those sanctimonious gated communities you have long railed against. You decide to make it your mission to eliminate that gate.
Your research soon reveals that the gate was never put to a vote by the HOA members. And while it was approved by the Board, the minutes from the meeting where the vote was held, show that the total cost was anticipated to be $10,000, when in fact the HOA ended up spending $20,000. Making matters worse, the project was completed by the HOA president’s brother, who owns a construction company. There is no sign that there were any competitive bids, and the brother failed to obtain worker’s comp insurance for the project. Had one of the workers been injured, it could have meant huge liability for the HOA.
You call me, saying you don’t care what it costs, you want to sue to get that gate removed. After all, what gives them the right to keep people out or to keep mother nature in? Man, they are some kind of sinners.
Here is what I would tell you (after explaining that I am not your attorney, so nothing I say should be taken as legal advice):
The Business Judgment Rule
The HOA’s governing body is protected by what is called the “Business Judgment Rule”, which is codified at section 7231 of the Corporation Code. It provides that “[a] director shall perform the duties of a director . . . in good faith, in a manner such director believes to be in the best interests of the corporation and with such care . . . as an ordinarily, prudent person in a like position would use under similar circumstances.” Subdivision (b) provides that the director is entitled to rely on information, opinions, and reports presented by certain specified persons. Subdivision (c) then provides, “[a] person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director . . . .” The rule provides further: “no cause of action for damages shall arise against, any volunteer director . . . based upon any alleged failure to discharge the person’s duties as a director” of a nonprofit organization if that person: (1) performs the duties of office in good faith; (2) performs the duties of office in a manner believed to be in the best interests of the corporation; and (3) performs the duties of office with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances.” (Corp. Code § 7231.5, subd. (a).) The business judgment rule “sets up a presumption that directors’ decisions are based on sound business judgment. This presumption can be rebutted only by a factual showing of fraud, bad faith or gross overreaching.”
The Wall of Wrong
You now know the applicable law. When analyzing the viability of a case, I tell potential clients to use what I have deemed to be the “wall of wrong” approach. You take each issue you deem to be a wrong, put it up on the shelves on the wall of wrong, and take down each item one at a time to determine if it will support a claim. Each claim must stand on its own; you can’t use non-claims to support legitimate claims.
As we take down and inspect the individual perceived wrongs from the wall of wrong, keep the last sentence of my legal summary above firmly in mind. The Business Judgment Rule, “can be rebutted only by a factual showing of fraud, bad faith or gross overreaching.”
So let’s begin with the decision to build the gate. Unless the governing documents of the HOA somehow provide otherwise, the gate project probably did not need approval. That would without question fall under the Business Judgment Rule. You may not agree with the decision, but the elected Board decided that a gate would be in the best interests of the members. So the decision to build the gate was protected. Take it down from the wall of wrong and never speak of it again.
The fact that the project went over budget would also not likely create an action. If the planned cost was $10,000, and the Board then spent $100,000, and had to draw money from contingency funds in order to pay for the gate, then you might be able to argue that was a breach of their fiduciary duties, but it would need to be extreme if you are going to argue that it constituted bad faith or gross overreaching. The difference between $10,000 and $20,000 would not, in my opinion, satisfy that requirement.
The fact that the gate project was undertaken without bids and was given to a family member of one of the board members is problematic, but that brings about another reality that many potential clients and even some attorneys fail to understand. To sue, you normally need to be able to show damages. OK, the board hired the president’s brother, but that may or may not be a bad thing. If you have evidence that the gate could have been built for $5,000, then you have the makings of a breach of fiduciary duty claim since the Board paid a family member far more than that amount. But perhaps the brother was hired specifically because he was willing to do it for far less than anyone else. Perhaps the Board members never obtained any formal bids because they had asked around and were told by other communities that a gate would cost $100,000. When the brother offered to do it for $10,000, they knew that getting bids would be a waste of time. And perhaps they aren’t particularly upset that the gate ended up costing $20,000, because that is still one-fifth the cost of what the gate would have cost with anyone else.
The same analysis applies to the brother’s failure to obtain worker’s comp insurance. That is a Romper Room no no, but what is the damage? A damage is something with a dollar sign in front. “He is required to have worker’s comp insurance” is not a damage. “We could have been sued if his worker was injured” is not a damage.
One final point to consider is the very conceptual nature of suing your HOA, and the finances involved. When you sue your HOA or its Board members, who pays for the attorney who defends the HOA or Board members against your suit? You do. It may be that the HOA will tender the claim to its insurer, so the insurer will pay for the defense counsel, but you and the other HOA members pay for the insurances, so it’s kind of a distinction without a difference.
Who pays for your legal action against the HOA or its Board members? You do. True, if you win you may be able to recover your attorney fees, but if you lose you pay all of the HOA’s attorney fees.
If you have a genuine beef against your HOA, that can meet the criteria of the Business Judgment Rule, then you can’t do better than Morris & Stone to pursue such a claim. But make sure the suit you are anticipating goes beyond just being unhappy with the decisions the Board is making.