FEATURE
Palm Springs Villas II Homeowners Association v. Erna Parth By Margaret G. "Gen" Wangler, Esq., CCAL
89 years old, had no formal training to serve on a board of directors and did not have an extensive business background. The court also noted that the Association had professional management and legal counsel the entire time she served on the Board. Expert testimony for both the Association and Ms. Parth indicated that it was "custom and practice" for boards to rely on professional management, in particular managers holding professional designations, for advice on issues such as whether the Board was in violation of the governing documents, or whether a legal opinion should be sought. The managers assigned to the Association during the relevant time period all held CCAM designations.
WHAT MANAGERS AND BOARD MEMBERS CAN LEARN FROM THE PARTH DECISION
I
n 2016, the California Court of Appeal released its opinion in Palm Springs Villas II Homeowners Association v. Erna Parth. The allegations against Association president Parth were that she took a variety of unilateral and/or unauthorized actions, including signing contracts, hiring an unlicensed contractor, signing promissory notes, and terminating the management company, without the requisite Board or Association membership approvals. One of the allegedly unapproved contracts was with a private patrol vendor. That vendor sued the Association for non-payment. The Association filed a breach of fiduciary duty cross-complaint against Parth, which led to the 2016 Court of Appeal opinion. The issue addressed by the Court of Appeal was whether or not Parth was entitled to the defense of the Business Judgment Rule. The Business Judgment Rule is a doctrine that can protect a board member from liability from errors of judgment. For the doctrine to apply, the court must find that the director was: (1) disinterested and independent; (2) acting in good faith; and (3) reasonably diligent in informing himself of the facts. The trial court ruled that Parth was entitled to the defense, but the Court of Appeal found that there were factual issues as to whether Parth was entitled to the protections of the Business Judgment Rule, and reversed the trial court. A 25-day court trial followed before Judge James Latting. Judge Latting ruled in favor of Ms. Parth, noting that she was
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Quorum October, 2019
The court found that the Association did not present sufficient evidence to support the allegations that Ms. Parth acted unilaterally and without approval. There was no evidence that the managers objected to Parth's actions, recommended obtaining a legal opinion or otherwise suggested that Parth was acting in excess of her authority or contrary to industry practices; Parth did not unilaterally hire a roofing contractor and was instead one of five directors who made that decision; she relied on management to review and approve invoices for the work, as required by the management contract. Similarly, Ms. Parth did not unilaterally sign loan documents; the loans were approved by the Board, and there was no evidence that management advised that a vote of the members was required or that legal counsel should review the loan documents or contracts.
