July 14, 2020
The Center for Consumer Law & Economic Justice, along with the Center for California Homeowner Association Law, Housing & Economic Rights Advocates, and Legal Aid Society of San Diego, requested publication of Coley v. Eskaton, a recent decision from California’s Third District Court of Appeal that held that homeowner association (HOA) directors can be held personally liable for their misconduct and self-dealing in managing an association. Significantly, the case clarifies that individual HOA directors owe fiduciary duties to the association and to the individual homeowners members.
In this case, a condominium owner brought suit against his homeowners association, two directors on the association’s board, and the directors’ employees. Two of the directors who worked for Eskaton (the condominium’s developer) had financial incentives to operate the board for the benefit of Eskaton. Specifically, the directors altered the budget to decrease Eskaton’s proper share of expenses, and disclosed privileged information to their own attorneys. The trial court found the directors had engaged in misconduct, but did not find the directors to be personally liable for the harm caused. Both parties appealed. The Third District agreed with the trial court that the directors had acted improperly, and further decided that the directors should be held personally liable for their actions.
The court specifically published the two sections of the opinion that it found to be particularly significant: its determination that the directors could not be saved from liability by the business judgment rule, and its conclusion that the directors should be held personally liable for their misconduct.
First, the Court of Appeal disagreed with the HOA directors’ contention that the business judgment rule, which gives deference to the decisions of directors who have acted in good faith, should have precluded liability in this case. The court explained that the business judgment rule does not apply to directors who have a material conflict of interest. In this case, the directors made no showing that their actions were in good faith or inherently fair, and so they forfeited the protection of the business judgment rule.
Second, the Court of Appeal agreed with the plaintiff that the trial court erred in not finding the directors personally liable for their breach of fiduciary duties. The court observed that to hold a director personally liable, there must be a fiduciary relationship, breach of fiduciary duty, and damages. The Court of Appeal determined that the plaintiff had made the proper showing.
The case is significant because employees of HOA developers often sit on HOA boards, so self-dealing is a recurring temptation for those directors. Though boards have conflict of interest policies, those policies are rarely enforced. Coley clarifies, first, that HOA board members have a fiduciary duty to the HOA and to the homeowners, so homeowners may sue over these conflicts of interest; and, second, that individual board members may be held personally liable for their actions. Since HOA board directors wield vast power over the 9 million California residents who reside in these communities, it is essential that those directors be held accountable for their actions when they harm homeowners.
The published decision in Coley makes it more likely that conflicted directors who violate their duty to homeowners will be held accountable.
Read the opinion here.