Many people have observed that community associations are actually “mini-governments.” The “citizens” (owners) elect “officials” (directors) to make both small and large decisions affecting their lives and assets. These decisions relate to property values, membership safety, long-term financial planning, use of property and maintenance of amenities.
Sometimes, the members disagree with the decisions made by directors and call special meetings to remove the board, to challenge its authority or to reverse its decisions. CID attorneys are often called upon to analyze these challenges and determine a question that goes to the very heart of how a community operates: who has the authority to make decisions for a community association—the board or the members? Actually, a better question is: which decisions are made by the board, which by the members, and which by either? This article discusses these issues.
Decision-Making Authority—The Basics
To put the issue in perspective, it is useful to consider Corporations Code §7210. In part, that section says that, subject to any limitations in the articles of incorporation or the bylaws relating to actions required to be approved by the members,
“The activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board.”
This provision, or one similar, is frequently found in community association bylaws. These legal principles mean that, unless the members are given the specific right to vote on an issue, all decisions of a community association should be made by, and solely by, the board.
Governing Documents and Statutory Law—Specific Allocations of Authority
Most bylaws and CC&Rs identify which decisions are to be made by the board and those which are to be made by the members. The Corporations Code and the Davis-Stirling Common Interest Development Act also allocate certain voting rights as between the board and the members. Typical (but not universal) examples of each are:
Authority vested in the board
- Entering into contracts of less than one year relating to goods or services for the common area
- Entering into management contracts
- Acquiring certain types of insurance
- Incurring expenditures for capital improvements up to five percent (5%) of the association’s budgeted gross expenses for a fiscal year
- Approving, preparing and distributing financial information (budgets, etc.)
- Conducting board meetings and electing officers
- Approving regular assessment increases of up to twenty percent (20%) and imposition of “emergency” and “unforeseen maintenance assessments”
Authority vested in the members (requires a membership vote)
- Electing and removing directors
- Approving regular assessment increases greater than 20 percent of an existing assessment
- Approving special assessments greater than 5 percent of budgeted gross expenses
- Amending governing documents
Areas of Dispute
Associations sometimes encounter controversies that trigger strong emotions among directors, the members, or both. These controversies sometimes turn political—the board will try to force the members to accept a decision, or maybe a petition signed by at least five percent (5%) of the members demands a special meeting to reverse the decision or to compel the board to do something else. These competing views of how an association operates often turn on how the board and the members believe decisions should be made and implemented in their community.
In our practice, we routinely encounter these disputes in many contexts. They include disputes relating to the commencement, continuation or settlement of construction litigation; a change in roofing material or paint color; pursuing CC&R violations; selecting, retaining or terminating management companies; the disclosure or distribution of “sensitive” association records; and decisions whether to make large scale renovations to the common areas, at what price and by which contractors. Each of these situations requires a careful legal analysis and a realpolitik calibration of what actions really must, can or should be taken or approved by the board, the members, or both.
There are times when a board may perceive its fiduciary duty requires an action with which the members may vehemently disagree. In those cases, it takes a fair amount of political courage for directors to stand firm and resist the temptation to “put the matter up for a vote.” Indeed, I believe there are times when a board breaches its fiduciary duty by asking the members to vote on an issue that clearly falls within the sole authority and obligation of the board.
A Case in Point—Earthquake Insurance
In the last few years, multiple natural catastrophes in California and throughout the nation (earthquakes, floods, landslides) have increased an awareness of the need to protect association members and assets from harm. At the same time, the strangely fluctuating earthquake insurance market—with often astronomical premiums, decreased coverage, higher deductibles and real financing implications—have made acquiring earthquake insurance more problematic. These “real world” concerns, however, exist in the context of governing document provisions that either require the board to obtain earthquake insurance, allow it to obtain “any other insurance deemed prudent,” state that the issue should be voted upon by the members or, finally, are completely silent on whether the board can, should or must obtain earthquake coverage.
Where the board must obtain earthquake insurance
Many bylaw provisions are precise in their requirement that a board must obtain earthquake insurance. This can pose very real practical and political problems for the board. It may be unable to obtain bids (sometimes required), the coverages available may be of little value because the limits are too low and the deductibles too high, or, simply, the cost may be prohibitive. On the other hand, if buildings are damaged when the “Big One” strikes, do any of us doubt that lawsuits will be filed against directors who failed to obtain earthquake insurance when the governing documents required it?
Where the board may obtain earthquake insurance
More typically, a bylaw provision will allow the board to obtain “such other insurance as it deems prudent” or will not address the issue at all. Does this take the board “off the hook”? Sad to say, some boards believe this type of provision is a “free pass” to avoid completely dealing with earthquake coverage. As discussed below, such boards are, it seems to me, as much at risk as directors who ignore a bylaw provision requiring the acquisition of this type of coverage.
Where the members decide
Finally, every now and then, we encounter a bylaw provision that states that earthquake insurance may be obtained, but only with the approval of the membership.
Resolving the Dilemma
Let’s not be wishy-washy. In my opinion, the duty imposed on each director to use good faith and to make decisions that he or she believes are in the best interest of the community requires all boards to research earthquake coverage and determine whether, and at what price, it is available. The level of analysis may be higher or lower, depending on each development’s unique facts—location, known structural deficiencies, and so forth.
If the governing documents require a board to obtain earthquake coverage but none can be obtained, a record of that fact should be maintained and communicated to the membership. The board should then seek an amendment to the governing documents to eliminate the provision requiring the board to obtain the coverage.
If the governing documents allow the board to obtain earthquake insurance “as deemed prudent,” the board should determine whether it is, in fact, reasonable to obtain and pay for the coverage. If the premium can be paid without an increase in assessments (or without an increase beyond 20 percent of the existing budget), no membership vote is required. The board should, however, advise the membership of its decision and the reasons therefor.
Can the board ask the members to approve an assessment to pay for earthquake coverage when the documents give the board discretionary authority to purchase the insurance or not? This is probably the most sensitive issue of all because it invites the board to avoid its obligation to make its own judgment by foisting the issue on the membership. Even worse, the outcome of the vote can be manipulated since a vote to approve an assessment to pay for the insurance would require the vote of only a majority of a quorum of members while, in many cases, a membership vote on the decision to acquire the insurance itself could require a majority of the total membership. In other words, if the vote is posited as an assessment increase, it would require less membership approval than if the vote were only on the pure issue of whether the coverage should be obtained.
In reality, there is no simple answer to the question of whether the board has breached its fiduciary duty (learn more about fiduciary duty) by putting the matter to a membership vote. A “clean” way of dealing with the issue is to secure a governing document amendment that puts the burden on the members, not the board. Short of that, asking the members to vote on an issue that should be decided by the board definitely raises the specter of post-earthquake claims for breach of fiduciary duty even if the members rejected the insurance proposal.
Finally, where the governing documents do allow the members to decide, it will usually be true that the board’s duty is limited to acquiring relevant information and then candidly and reasonably submitting the matter to a membership vote. In extreme cases, the board’s general fiduciary duty to operate the development in the best interests of the community might require it to obtain earthquake insurance even where the membership refuses. However, this will be the exception and not the rule.
Conclusion
As a practical matter, the most important “vote” the members make is for the directors who represent them. That is because almost all decisions affecting a community are made by the association’s directors and not the members. The members’ right to vote is always spelled out in the governing documents; if not found there, such a right usually does not exist. In certain cases, a board will be able to look to the members to make the final decision on particularly important matters but, where the authority to make a decision clearly rests with the board, its failure to exercise that authority could subject it to future claims.
Steve Weil is one of the founding principals at Berding | Weil LLP in Walnut Creek, CA. He has practiced community asociation law since 1984 and has dealt with virtually every kind of challenge facing directors, managers and community association members. He is a member of the ECHO board of directors.