Tag Archives: Board Powers

Director Qualifications

There is no law that explicitly establishes qualifications for persons wishing to serve on an association’s board of directors. There may be qualifications established in provisions of an association’s governing documents—typically in its bylaws. However, those provisions often include language that merely “encourages” adherence to stated qualifications, rather than making them mandatory requirements. Where director qualifications are entirely absent from an association’s governing documents, there may be circumstances where any person (i.e., non-owners, tenants, etc.) may be eligible to serve as a director and ultimately elected to the board.

Adopting Director Qualifications
In order to make adherence to specific director qualifications mandatory, an association may be required to formally amend its bylaws or its election rules. The limitations and requirements applicable to doing so will depend upon various factors, such as the nature/purpose of the desired qualifications and the language already contained within the governing documents.

Amending the Bylaws
An association’s bylaws may be amended according to the procedures and voting requirements contained within the bylaws. Bylaw amendments to incorporate director qualifications will often require membership approval through a formal election utilizing secret ballots. (See “Amendments to Bylaws” and “Elections Requiring Secret Ballots.”) Where a director ceases to meet required qualifications in effect at the beginning of the director’s current term of office, Corporations Code Section 7221(b) allows the board to declare the director’s seat vacant. (See also “Removal & Recall of Directors.”)

Director Qualifications vs. Candidate Qualifications
Director qualifications govern who remains qualified to continue to serve on a HOA’s board of directors. Candidate qualifications, by contrast, govern who is qualified to run for and be elected to the HOA’s board of directors in a director election.

Candidate Qualifications within Election Rules
Associations are required to adopt election rules that comply with the requirements set forth in Civil Code Section 5105. (See “Election Rules.”) Election rules are “operating rules” that may be adopted and amended by the board without membership approval. For information on the types of candidate qualifications that may or must be adopted as part of the election rules under Civil Code § 5105, see “Candidate Qualifications.” Persons who do not satisfy the candidate qualifications in effect at the time of nomination are disqualified from nomination. (See “Candidate Nomination”.)

“Reasonable” Director Qualifications
Once adopted, director qualifications may be enforced provided that they are “reasonable.” Reasonableness is determined by whether the qualification is rationally related to the protection, preservation or proper operation of the association. (Laguna Royale Owners Assn. v. Darger (1981) 119 Cal.App.3d 670.)

Director qualifications that are commonly adopted by associations include:

  • Being a member of the association
  • Being in “good standing” (i.e., not in violation of the governing documents, delinquent in assessments, etc.)
  • Not involved in litigation with the association
  • Attending a minimum number of board meetings as a director
  • Not having a familial relationship with another sitting director
  • Not being a co-owner with another sitting director
  • Not a convicted felon

Duties of Directors (Generally)

In their efforts to manage the common interest development, the directors of an association have numerous duties under California law and as specified in the association’s governing documents. The general duties of directors include:

Enforcement  – Enforce the governing documents through disciplinary measures and in some instances litigation.

Maintenance – Maintain and repair the common areas and other items which the association may have an obligation to manage under the governing documents or other contractual agreements.

Financial Management – Levy and collect assessments, pay the association’s bills, review financial records, prepare budgets and financial statements, and manage the reserve account.

Operations – Manage the day-to-day operations of the association. This typically involves utilizing professional management, legal, accounting, landscape, pest control, and insurance services.  In addition, the board must set policies to ensure the smooth operation of the association and to govern the use of the association’s common area facilities and recreational amenities.

The powers and authority granted to the board under California law and the association’s governing documents are aimed at assisting the directors in carrying out these duties.

Fiduciary Duties
As fiduciaries, directors are held to a high standard of conduct in carrying out their duties for the benefit of the association and its membership.

Delegating Duties
Subject to certain limitations, the board may validly delegate some of its duties to other persons, such as a professional manager or committee of the association.

Director & Officer Liability Protection

Volunteer officers and directors of an association are required to make decisions which may have significant legal and financial implications for the association and its membership. Because they do not receive any compensation in their roles as volunteers, they are afforded certain protections against personal liability similar to those afforded to directors and officers of other types of nonprofit corporations. Those protections are necessary in order to ensure that an association will be able to recruit people to serve on its board:

“The Legislature finds and declares that the services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California. The willingness of volunteers to offer their services has been deterred by the perception that their personal assets are at risk for these activities…It is the public policy of this state to provide incentive and protection to the individuals who perform these important functions.” (Corp. Code § 5047.5(a).)

The liability protections which are extended to directors and officers are as follows:

Directors and Officers Insurance (“D&O Insurance”)
D&O Insurance protects against errors and omissions made by officers and directors while they were serving on the board. Subject to certain criteria, Civil Code Section 5800 also protects volunteer directors and officers from personal liability in excess of the association’s insurance coverage provided that the board maintains at least the minimum levels of D&O Insurance required by Civil Code Section 5800(a)(4). The required minimum levels are contingent upon whether the common interest development consists of “100 or fewer separate interests” or “more than 100 separate interests.” (Civ. Code § 5800(a)(4)(A)-(B).)  However, the protections under Civil Code Section 5800 do not apply “to a volunteer officer or director who…is an owner of no more than two separate interests in the common interest development.” (Civ. Code § 5800(e); See also “Directors & Officers (D&O) Insurance.”)

Statutory Indemnity
California law protects volunteer directors and officers from personal liability while serving on the board subject to certain criteria. (Civ. Code § 5800; Corp. Code § 5047.5(b).)  The Corporations Code also extends additional liability protections for directors and officers under the Business Judgment Rule. Directors and offers may also be indemnified by the association if the directors and officers had no reasonable cause to believe their conduct was unlawful. (Corp. Code § 7237.)

Governing Documents
An association’s CC&Rs and/or bylaws may also contain exculpatory, hold harmless and indemnity provisions that provide liability protections for officers and directors arising from negligent acts or omissions they made while serving on the board.

Board Powers & Authority

The board of directors of an association is granted broad authority and powers under the law and as specified in the governing documents of the association. Unless the governing documents provide otherwise, the board, on behalf of the association, may generally exercise the powers granted to a nonprofit mutual benefit corporation as enumerated in Corporations Code Section 7140, regardless of whether the association is in fact incorporated. (Civ. Code § 4805.) The powers granted to the board typically include the following:

Governance
Appoint directors to fill vacancies on the board;
Elect and remove officers;
Appoint committees;
Call membership meetings and appoint inspectors of election;
Inspect the association’s records

Financial
Manage and disburse funds from the reserve account;
Invest funds;
Levy and collect regular, special and emergency assessments;
Pay expenses incurred by the association;
Prepare and adopt budgets

Enforcement
Enforce the governing documents (i.e., the CC&Rs, bylaws and operating rules);
Adopt and amend operating rules (i.e., architectural standards, parking rules, etc.);
Collect delinquent assessments
Initiate and defend lawsuits;

Management
Manage the association;
Delegate management and certain board powers;
Maintain and repair the common areas;
Construct limited capital improvements;
Negotiate and enter into contracts;
Insure the association;
Hire and fire employees and vendors of the association

Delegate Powers
Under certain circumstances, the board has the authority to delegate certain powers of the board to the association’s manager, committees, or other persons. (See “Delegating Duties & Authority.”)

Judicial Deference
Provided that a board acts within the scope of its authority and in furtherance of its duties, courts will defer to decisions made by the board regardless of whether the board could have made a better decision. (See “Rule of Judicial Deference.”)

Board of Directors (Generally)

An association’s “board of directors” is comprised of persons elected to govern the common interest development. Because most associations are incorporated as nonprofit mutual benefit corporations, they are legally required to have a board to exercise corporate powers in the management of the association’s activities and affairs. (Corp. Code § 7210.) The boards of older, unincorporated associations are often defined as “boards of governors.”

Number of Directors
The number of directors that are elected by the association’s membership to serve on the board is typically established in the association’s bylaws. The number is often an odd number (in most cases, five (5) directors) in order to prevent dead-locked boards and tied votes.

Role of the Board
The board is vital to the effective operation and management of the association, as well as to preserving the property values of the association’s members. The primary responsibilities of the board are to: (1) manage the common areas, (2) enforce the governing documents, (3) manage the association’s finances, and (4) set policies to assist the operation of the association. These responsibilities must be performed “in good faith, in a manner such director believes to be in the best interest of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Corp. Code § 7231(a); See also “Duties of Directors (Generally).”) For information on the authorities and powers typically afforded to the board, see “Board Powers & Authority.”

Fiduciary Duties
The board is entrusted with significant financial and operational responsibilities in managing the association’s affairs. Directors are therefore held to a higher standard—they are deemed “fiduciaries” with the obligation to act in the best interests of the association and its membership. (See “Fiduciary Duties of Directors.”)

Volunteer Capacity
The directors serve on the board as volunteers. The term “volunteer” is defined under Corporations Code Section 7231.5(b) to mean:

“…the rendering of services without compensation. ‘Compensation’ means remuneration whether by way of salary, fee, or other consideration for services rendered. However, the payment of per diem, mileage, or other reimbursement expenses to a director or executive officer does not affect that person’s status as a volunteer within the meaning of this section.”

Serving in the capacity of a volunteer provides a director with certain liability protections for actions the director takes on behalf of the association.  (Civ. Code § 5800; Corp. Code § 5047.5.)

Director Compensation
As volunteers, directors may not receive a salary or other form of consideration (i.e., a discount in assessment payments) in exchange for their services. (Corp. Code § 7231.5.) A director may, however, be reimbursed for “actual expenses incurred…in the execution of the [director’s] duties” without affecting the director’s status as a volunteer. (Civ. Code § 5800(b).) An association’s bylaws and CC&Rs typically contain provisions explicitly prohibiting the directors from receiving compensation in exchange for their services.

Corporations Code Section 7812. Approval Requirements for Amendments.

(a) Except as provided in this section or Section 7813, amendments may be adopted if approved by the board and approved by the members (Section 5034) and approved by such other person or persons, if any, as required by the articles. The approval by the members or other person or persons may be before or after the approval by the board.

(b) Notwithstanding subdivision (a), the following amendments may be adopted by approval of the board alone:

(1) An amendment extending the corporate existence or making the corporate existence perpetual, if the corporation was organized prior to August 14, 1929.

(2) An amendment deleting the names and addresses of the first directors or the name and address of the initial agent.

(3) Any amendment, at a time the corporation has no members; provided, however, that if the articles require approval by any person for an amendment, an amendment may not be adopted without such approval.

(4) An amendment adopted pursuant to Section 9913.

(c) Whenever the articles require for corporate action the approval of a particular class of members or of a larger proportion of, or all of, the votes of any class, or of a larger proportion of, or all of, the directors, than is otherwise required by this part, the provision in the articles requiring such greater vote shall not be altered, amended or repealed except by such class or such greater vote, unless otherwise provided in the articles.

Corporations Code Section 7223. Judicial Removal of Director.

(a) The superior court of the proper county may, at the suit of one of the parties specified in subdivision (b), remove from office any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation or breach of any duty arising as a result of Section 7238 and may bar from reelection any director so removed for a period prescribed by the court. The corporation shall be made a party to such action.

(b) An action under subdivision (a) may be instituted by any of the following:

(1) A director.

(2) In the case of a corporation where the total number of votes entitled to be cast for a director is less than 5,000, twice the authorized number (Section 5036) of members, or 20 members, whichever is less.

(3) In the case of a corporation where the total number of votes entitled to be cast for a director is 5,000 or more, twice the authorized number (Section 5036) of members, or 100 members, whichever is less.

(c) In the case of a corporation holding assets in charitable trust, the Attorney General may bring an action under subdivision (a), may intervene in such an action brought by any other party and shall be given notice of any such action brought by any other party.

Corporations Code Section 7221. Removal of Director for Cause.

(a) The board may declare vacant the office of a director who has been declared of unsound mind by a final order of court, or convicted of a felony, or, in the case of a corporation holding assets in charitable trust, has been found by a final order or judgment of any court to have breached any duty arising as a result of Section 7238, or, if at the time a director is elected, the bylaws provide that a director may be removed for missing a specified number of board meetings, fails to attend the specified number of meetings.

(b) As provided in paragraph (3) of subdivision (c) of Section 7151, the articles or bylaws may prescribe the qualifications of the directors. The board, by a majority vote of the directors who meet all of the required qualifications to be a director, may declare vacant the office of any director who fails or ceases to meet any required qualification that was in effect at the beginning of that director’s current term of office.

Corporations Code Section 7214. Instrument Executed by Corporate Officers.

Subject to the provisions of subdivision (a) of Section 7141 and Section 7142, any note, mortgage, evidence of indebtedness, contract, conveyance or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by any one of the chairman of the board, the president or any vice president and by any one of the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.