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THE ASSOCIATION USE ITS TO FIGHT THE GOOD FIGHT? E
very so often an issue arises that significantly affects the residents of a homeowners association even though the issue is created by an
outside source. For example, the residents may be affected by a street-widening proj- ect even if the street is located outside of the community. Local development, changes in flight paths for the nearby airport, zon- ing of city homeless shelters and other lo- cal issues can have a dramatic impact on the quality of life. What if the association would like to get involved and utilize asso- ciation funds to fight the good fight?
Te safest approach in these kinds of cir- cumstances is for a board to direct mem- bers towards another entity designed to take up the fight. A board can certainly assist in providing helpful information to the residents and acting as a conduit to dis- seminate updates and resources. A board can aid residents by providing contact in- formation for charities or activists that can use donations to fight for the collective good. However, the problem with this ap- proach, or so I have been told by countless board members in this situation, is that the residents will not “donate” money unless they are forced, meaning the association needs to collect the money via assessments and spend it on behalf of the members to really effectuate change.
The board’s power to spend association re- sources is dictated by the governing docu- ments. Some homeowners associations have a great deal of discretion in these matters and others have no ability at all to make such an expenditure. A common provision found in governing documents reads “[a]ssess- ments must be used exclusively to promote the recreation, health, safety and welfare of its members and for the improvement and
maintenance of the Common Area.” Tis kind of language does not strictly limit ex- penditures in that it allows expenditures to promote “welfare,” but it is difficult to know how far you can stretch the definition of “welfare.” When the language of the docu- ments is not clear, we turn to California case law to assist with the interpretation.
In Finley v. Superior Court, multiple home- owners associations collectively spent over $500,000 in association funds to support local ballot measures seeking to prevent a local decommissioned military air station (El Toro) from being converted to a com- mercial airport. Unfortunately, the portion of the case that discussed the appropriate- ness of the expenditure was not published. However, based upon the language in the governing documents for the contribut- ing homeowners associations, the appel- late court found that the expenditures were proper. Te published reasoning is that the Board believed that the money was being spent in the best interest of the corporation and the governing documents permitted such an expenditure.
Te Court held that under the business judgment rule, a director cannot be held li- able for actions taken in good faith which he or she believes, based upon reasonable investigation, to be in the best interest of the corporation. Te complaining homeowners argued that the business judgment rule does not apply to actions which are ultra vires or illegal. In other words, they argued that the Board had no authority to spend the asso- ciation’s money fighting an airport proposal. Te Court held it was within the authority of the Board to do so. Because a portion of the decision was not published, we do not know what language the Court used to come to that decision.
In contrast, in the case of Spitser v. Kent- wood Home Guardians, which had rela- tively similar facts, an association’s expen- diture of assessment funds to finance liti- gation to abate airport noise was found to be improper on the grounds that the governing documents in Spitser narrow- ly defined the purposes of the defendant association. Te Articles of Incorpora- tion described the corporate purposes as: “[T]o exercise generally all powers of … interpretation … and construction of all conditions, restrictions and charges now in effect ... affecting the real property herein described ... .” Te Spitser court found that the governing documents in- dicated that the purpose of assessments was for the maintenance of the common areas, and to enforce the CC&Rs. While the CC&Rs did prohibit nuisances, they only operated as to property subject to the CC&Rs (which did not include the airport). Accordingly, the CC&Rs did not support imposition of assessments to finance the lawsuit in question.
What does it all mean? Tis is not a “one size fits all” issue. In order for a board to make a decision to commit association funds to fight or support an external issue, it is necessary to first determine if the language of that particular asso- ciation’s governing documents supports that decision. If it does not, the board members could be subjecting themselves to personal liability for trying to do what they believe is the right thing and fight
the good fight.
This article was written and submitted by Denise Iger, Esq. of Iger Wankel & Bonkowski, LLP.
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