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Palm Springs Villas II Homeowners Association v. Erna Parth
By Margaret G. "Gen" Wangler, Esq., CCAL
WHAT MANAGERS AND BOARD MEMBERS CAN LEARN FROM THE PARTH DECISION
In 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
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.
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.
Based on the evidence presented, Judge Latting concluded Ms. Parth did not act in bad faith, or in her own self-interest, and found that she was protected by the Business Judgment Rule. The association is appealing the judgment to the California Court of Appeal.
1. Managers, especially managers with professional designations, are held to a high standard and directors are entitled to reasonably rely on the manager.
2. Management contracts may obligate the manager to perform certain tasks, such as assisting with enforcement or having contracts reviewed. So board members and managers must know the manager's duties under the contract.
3. Board members should protect themselves by requiring that the manager perform due diligence investigations before approving contracts or loans.
4. When appropriate, managers should provide advice, including recommendations to consult with experts. Managers are the "issue spotters" for the board, and should speak up when an expert opinion should be obtained for the board to make an informed decision.
5. Documentation of decisions is vital, as is reciting the reasons for decisions, e.g., obtained references, reviewed legal or other expert opinions.
6. Take care when drafting meeting minutes and resolutions. Courts will review these documents carefully if decisions are challenged. Motions should be clearly stated, as well as the votes on the motions.
7. Avoid "ratifying" prior actions; ratify only when absolutely necessary, e.g., emergencies.
8. Managers should remind board members that all discussions and deliberations concerning association business should be done in properly noticed board meetings, e.g., no email discussions.
9. If a board member is "rogue," the other board members have a duty to take action; each director has a duty to participate in decision making.
Margaret G. "Gen" Wangler, Esq., CCAL, is a senior shareholder with the law firm of Fiore Racobs & Powers, A PLC. Ms. Wangler can be reached at 760-776-6511 or by email at gwangler@fiorelaw.com.
