Beginning January 12, 2012, any new governing documents (e.g., CC&Rs, Bylaws or Rules and  Regulations) or any amendment to any of those documents that includes a prohibition on rental or leasing will not apply to anyone who purchased before the date the governing document and/or amendment was adopted or recorded unless that person consents to be bound.

What is considered a “prohibition” on rental or leasing?  Unfortunately, Civil Code Section 1360.2 does not answer this question.  This language may address any restriction on leasing or may only address certain types of provisions such as “rental ceilings” where only a certain percentage of residences (e.g. 30%) can be leased at any one time.

If your association is considering adopting any type of restriction on leasing and you want to ensure that all current and future owners are bound by that provision, you will need to adopt that change before January 1, 2012.  Be sure to act quickly - a vote of the members may be required!

If you are considering adopting a  leasing restriction, please contact me or Laurie Poole so that we may discuss the specific requirements for your association.

FACTS OF THE CASE

This case involved amendments to a recorded declaration of restrictions (“DoRs”) for the Costa Serena community.  The DoRs provided for the establishment of an architectural committee (“Committee”), and also contained architectural provisions and age restrictions for a senior housing development.  Costa Serena was first established in the 1970’s and was built in 7 phases.  Each phase had its own set of DoRs.  The amendment provision in each set of DoRs originally stated:

Subject to the provisions of paragraph[s] 16 and 27, the provisions of these restrictions, other than this paragraph, may be amended by an instrument in writing signed and acknowledged by record owners of at least seventy-five percent (75%) of the units located on the real property, which amendment shall be effective upon recordation in the Office of the Recorder of San Diego County, California.

In 1986, in response to a change in the law, the Committees for each of the seven phases recorded amendments to the DoR’s increasing the minimum age of residents from 45 to 55. Each amendment was signed by one or more individuals certifying they were members of the Committee and that the amendment had been approved by 75% of the owners in the corresponding phase.  KThe owner signatures were not attached.

In 1987, an amendment to the DoRs was recorded which consolidated the 7 phases into one development, subject to one set of DoRs and established one Committee.  The amendment also changed the procedure to amend the DoRs in the future by allowing a majority of the Committee to certify that the required percentage of owners voted to approve amendments.  Similar to the previous year’s amendment, the 1987 amendment did not contain the owner signatures, but a certification from the Committee stating the amendment had been consented to by 75% of the owners in each of the 7 phases.

A third amendment was recorded in 1999 which further changed the amendment provision by requiring amendments to be approved by over 50% of “all owners entitled to vote and casting ballots.”  The 1999 amendment was signed by members of the Committee who certified that the amendment had been adopted by a vote of the owners as required by the DoRs.

The original DoRs were due to expire on December 31, 2006, but by its terms, could be extended.  The extension provision stated, in pertinent part:

Each and all of the foregoing conditions and restrictions shall terminate on December 31, 2006, unless the owners of a majority of said lots have executed and recorded at any time within six (6) months prior to December 31, 2006, in the manner required for a conveyance of real property, a writing in which they agree that said Conditions and Restrictions shall continue for a further specified period . . .

In 2006, the Committee attempted to amend and restate its DoRs, using the amendment procedures contained in the 1987 and 1999 amendments. During the vote on the proposed restated DoR’s, plaintiff, a group of owners (“Coalition”) who no longer wanted the community to be a “senior housing development,” filed a lawsuit and successfully enjoined the Committee from tabulating the ballots on the restated DoRs.  The main basis of the Coalition’s claims was that the 1986, 1987 and 1999 amendments to the DoRs were not procedurally correct and therefore were void ab initio and could be challenged at any time.

The Committee then attempted to extend the existing DoRs by obtaining written consent (signed and notarized) by a majority of the owners in the entire development.  An extension document was recorded in September, 2006 which contained the signed/notarized consents of the Owners as an exhibit.  In November, 2006, additional consent forms were recorded.

The Coalition supplemented its lawsuit to include a challenge to the DoR extension.  The Coalition claimed that since the amendments were invalid, the development had not been consolidated and the Committee failed to prove that it obtained consent from a majority of the owners in each of the 7 phases.

TRIAL COURT PROCEEDINGS

In November, 2007, the trial court granted a summary judgment motion in favor of the Coalition.  The trial court, relying on several cases, including Taormina Theosophical Community. v. Silver (1983) 140 Cal.App.3d 964, determined that since  the three amendments had not been adopted pursuant to the required procedures in the original DoRs, they were void ab initio and could be challenged at any time.  Since the community had never been validly consolidated, he further found that the extension needed the consent of a majority of the owners in each of the 7 phases.

The trial court excluded from evidence, numerous consent forms signed by the owners on the basis that they did not conform to information on the deeds of the lots and therefore were insufficient to convey real property.  The exclusion of these consent forms resulted in the Committee being unable to prove that a majority of the owners in each phase had consented to extend the DoRs.

The trial court rejected the Committee’s contention that  challenges to the amendments were barred by the statute of limitations.  The trial court ultimately determined that as of January 1, 2007, no valid declaration  of restrictions or similar instrument existed which governed any of the lots in the Costa Serena community, including the age restriction.

PROCEDURAL CHALLENGES TO AMENDMENTS

On appeal, the focus was whether challenges to the procedure by which CC&Rs are amended can be brought at any time which, if successful, would render the amendment void.  The Coalition’s only challenge to the amendments was  that they were enacted in a manner that failed to conform to the requirements of the DoR provision that outlined how they could be amended. The court noted that there was no claim that the amendments were procured by fraud or some other method that would undermine the validity of the amendments from their inception.

The court of appeal rejected the trial court’s reliance on the Taormina case:

The case does not speak to the issue here-i.e., whether an amendment that was not enacted pursuant to the procedure set out in the provisions of a declaration of restrictions is void ab initio, or merely voidable. The Taormina court never expressly considered the question whether the parties’ challenge to the amendment at issue in that proceeding would render the amendment voidable or rather, void ab initio.

Since the challenge to the amendments in Taormina  were filed within three years of the recording of the amendment in question, that court did not focus on the timeliness of such a challenge.

Rather, the Costa Serena court concluded that the Coalition did not show that the amendments were void ab initio, but that, at most, the amendments may be voidable

The court of appeal then analyzed the Committee’s contention that the Coalition’s challenge to the three amendments was not timely brought under the four year statute of limitations of Code of Civil Procedure Section 343.  The court recognized that other cases have applied this statute in cases seeking to cancel voidable instruments.  The court concluded that the four year statute applied in this case to the Coalition’s claims seeking to invalidate the three amendments.

The next question was when the four years would begin to run.  The court recognized that the statute of limitations begins when a “manifest and palpable” injury occurs.  If the amendments were ineffective due to the manner in which they had been adopted, the court reasoned that the “injury” would have occurred upon recording of the amendments since that is when the amendments were put into effect.  The court also noted that recording the amendments served to provide notice to anyone who may have wished to challenge their validity.  The court held that recording the amendments triggered the beginning of the four year statute of limitations.

Since the Coalition’s 2006 lawsuit was filed 20, 19 and 7 years after the respective amendments were recorded, its claims challenging the amendments were time-barred.  The appellate court ruled that the trial court erred in determining that the three amendments were void.

VALIDITY OF DoR EXTENSION

The appellate court then examined the validity of the 2006 DoR extension.  Since the 1987 “consolidation” amendment was deemed to be valid, the appellate court rejected the Coalition’s contention that a majority of owners in each of the 7 phases had to consent to extending the DoRs.
Since the Committee proved that a majority of the total lot owners within Costa Serena had consented to the extension, the extension was valid.

Furthermore, the appellate court ruled on the evidentiary objections to the Owners’ consent forms and held that is that it was not necessary to have each homeowner execute and record a document that would be sufficient to convey property in order to comply with the DoR extension provision.  Rather, the extension document itself must comply, which it did.  Therefore, the extension of the DoRs was valid.
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The appellate court reversed the trial court’s order and remanded the case to the trial court to enter judgment in favor of the Committee.

WHY THIS CASE IS IMPORTANT FOR HOMEOWNERS ASSOCIATIONS

Although the Costa Serena community was not a “common interest development,” the holdings of this case would apply to any community with recorded declaration of covenants, conditions and restrictions.  Occasionally, prior amendments to CC&Rs, on their face, do not conform to the procedures for their adoption.  Based on the holdings in this case, we now understand that in those circumstances:

1.    CC&R amendments that did not conform to the procedures required to be followed are not void ab initio, but are “voidable.”  This means that they can not be challenged at any time.

2.    Challenges to the procedures by which a CC&R amendment was adopted is subject to the four (4) year statute of limitation of Code of Civil Procedure Section 343.

3.    Challenges to the procedures by which a CC&R amendment was adopted must be brought within four years of the date of recording the amendment. .

These holdings are regarding the procedures by which an amendment has been adopted.  If an amendment contains substantive issues that are problematic, it may still be void at any time.

Furthermore, this case will help those communities where the recorded CC&Rs contain a termination provision that requires affirmative action to extend the document.  Depending on the wording of that provision, it may not be necessary to obtain signed/notarized signatures of the owners within the community in order to extend the CC&Rs.  This can save a community a significant amount of time, money and effort in extending their CC&Rs.

The legal issues involved in this case are complex .  If your association has a question regarding the validity of prior amendments, automatic termination of CC&Rs, or the procedure to extend the CC&Rs, you should consult with legal counsel who is familiar with the laws governing the amendment process.

Peters & Freedman L.L.P. has been directly involved in developing significant California caselaw regarding amending governing documents.  Our firm restated the CC&Rs and Bylaws and was trial counsel in the Superior Court proceedings which were the subject of Fourth La Costa v. Seith (2008) 159 Cal. App. 4^th 563.  Peters & Freedman, L.L.P. was also trial and appellate court counsel in the case of Mission Shores v. Phiel (2008) 166 Cal. App. 4th 789.  Our firm drafted the amendment and prepared and recorded the extension of restrictions which was the subject of Costa Serena Owners Coalition v. Costa Serena Architectural Committee (2009) 175 Cal. App. 4th 1175.

Enjoy!

Enjoy!

This year SB 741 was proposed and approved by the California Legislature.  This bill revised and added various provisions to the Proprietary Security Services Act set forth in the California Business and Professions Code.  The effect of these changes is as follows:

1. Proprietary Private Security Employers must register with the Department of Consumer Affairs.
2. Proprietary Private Security Officers must register with the Department of Consumer Affairs.
3. Proprietary Private Security Officers must complete training in security officer skills within six (6) months of the date registration is issued or within six (6) months of employment by a proprietary private security employer.

A proprietary private security employer is defined in the new law to include persons or entities who have one or more employees who provide security services for the employer and only for the employer.  Unfortunately the new laws do not define what constitutes “security services,” but these arguably include many services provided by “security guards” or “patrols” at an association.  Chances are that if your association hires anyone who arguably provides any security-type services exclusively for your association, it will be considered a proprietary private security employer.

A proprietary private security officer is defined in the new law as an unarmed individual who:

1. Is employed exclusively by any one employer
2. Has a primary duty is to provide security services for his or her employer
3. Provides services not contracted to any other entity or person
4. Is not exempt under Section 7582.2 (various exceptions)
5. Is required to wear a distinctive uniform identifying the person as a security officer
6. Is likely to interact with the public while performing duties

A proprietary private security employer is required to register and pay a $75 registration fee.  The registration lasts for two years and can be renewed thereafter at a cost of $35.  In addition to registering, proprietary private security employers must also:

1. Maintain an accurate and current record of the name, address, commencing date of employment and position of each proprietary private security officer and the date of termination of employment if terminated.
2. Maintain an accurate and current record of proof of completion by the officer of the required training and an archive of such training for at least two years.

A proprietary private security officer is required to register and pay a $50 registration fee.  The registration lasts for two years and can be renewed for a cost of $35.  The proprietary private security  officer must also:

1. Complete an approved training course within six months of registration being issued or within six months of employment with a proprietary private security employer.
2. Carry with them while on duty a valid and current proprietary private security officer registration card or a hard copy printout of the bureau’s approval form and a valid driver’s license or government issued ID card.

The penalties for not complying with these requirements for proprietary private security officers includes fines between $250 and $1000 and, depending on the circumstances, could include additional penalties.

While these new laws do not apply to associations who contract with outside sources for their security patrols, if your association directly employs any security officers, steps should be taken in the year 2010 to ensure compliance when these new laws become effective on January 1, 2011.  If your association needs assistance, please feel free to contact our office.

CAI FAQ - HA Condominium Guidelines

On Friday, November 6, 2009, the Federal Housing Administration (FHA) issued two documents related to FHA mortgage insurance requirements for condominium associations. These two documents: HUD Mortgagee Letter 2009-46A and Mortgagee Letter 2009-46B provide an overview of the FHA proposed transitional criteria and successor criteria for condominium association requirements for FHA mortgage insurance. For a full summary of the new requirements, please click here.

What is FHA Mortgage Insurance?

FHA mortgage insurance is a policy that protects lenders against some or most of the losses on a mortgage if the borrower defaults on the mortgage. FHA insurance is typically required on mortgages where there is less than a 20 percent down payment. The insurance is funded by a fee on the overall mortgage amount and a small annual levy on the loan amount.

FHA insurance is important, as it provides a mechanism to recover losses associated with default and ensures a continuing flow of money into the mortgage markets.

Why Should My Association Care about the FHA Requirements?

This is an issue of interest for condominium associations as FHA insured mortgages are playing an increasingly important role as a financing mechanism for those seeking to purchase condominium units. While traditionally, FHA-insured mortgages played a small role in the housing markets (approximately 5 percent in 2007), that number has increased to roughly 20 percent of mortgage originations in 2008.

As lenders continue to reexamine and tighten lending criteria, qualifying for FHA mortgage insurance provides potential buyers with an additional financing option and, thus, makes units in your condominium association marketable to a larger pool of potential buyers.

How Does the FHA Approval Process Work?

Typically a lender processes the paperwork associated with meeting FHA requirements. For new developments, developers may also work with FHA to have their project pre-qualified for FHA financing.

In processing the paperwork to qualify for FHA approval, lenders will seek information required by the FHA from a condominium association. Condominium associations may also be able to work directly with the FHA to qualify for financing.

Once a project qualifies for FHA mortgage insurance, FHA may insure mortgages for buyers in a condominium up to a certain percentage of units.

What FHA Criteria Apply to Condominium Associations?

The FHA mortgagee letters outline criteria that lenders or FHA will examine to determine whether a condominium association qualifies for mortgages insured by FHA. For existing condominium associations, these criteria include:

Eligible Projects - Eligible projects are declared condominium projects that exist in full compliance with appropriate state law. Condominium hotels, timeshares, houseboat projects, multi-dwelling unit condominiums and projects not deemed to be residential are not eligible for FHA insurance under the regulations.

Eligibility Requirements - All condominium project approvals must meet the following requirements:

• Projects must consist of two or more units.
• Projects must be covered by hazard and liability insurance and flood and fidelity insurance where applicable.
• Right of first refusal is permitted, provided it does not violate the Fair Housing Act regulations found in 24 CFR Part 100.
• No more than 25 percent of the total floor area can be used for commercial purposes. The commercial portion must also be of a “nature that is homogenous with residential use.”
• No more than 10 percent of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent out vacant and unsold units. For projects with 10 or fewer units, no single entity can own more than one unit.
• Delinquent Homeowners Association Dues [Assessments]: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.
• At least 30 percent of the total units must be sold prior to endorsement of a mortgage in on any unit. After December 31, 2010, the pre-sale requirement will increase to 50 percent. (See Presale section below)
• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units. (Through December 31, 2010, or otherwise provided by FHA, bank-owned properties, vacant, or tenant-occupied real estate-owned properties are excluded from this calculation.)

Budget Review - Mortgagees must review all homeowner’s association budgets (actual budgets for existing projects and projected budgets for new projects) for all project approvals.

• The review must determine that the budget is adequate and:
• Includes allocations/line items to ensure sufficient funding for upkeep of amenities and features unique to the project.
• Provides for the funding of replacement reserves for capital expenditures and deferred maintenance amounting to at least 10 percent of the budget.
• Provides adequate funding for insurance coverage and deductibles (as required under the insurance requirements section).
• If the documents do not meet these standards, the mortgagee may request a reserve study to assess the stability of the project. The reserve study cannot be more than 12 months old. In reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.

Insurance Requirements- Condominium projects must be covered by hazard, flood, liability, and other insurance as required by state or local laws, or acceptable to FHA under the following criteria:

Hazard Insurance: The Condo Association is required to maintain a master or blanket property insurance equal to 100 percent of current replacement costs exclusive of land, foundation, excavation, or other normal exclusions. If the association does not maintain 100 percent coverage, unit owner gap coverage does not satisfy meeting this requirement.

• HO-6 Coverage: In cases in which the master policy does not include interior unit coverage, the borrower must obtain a “walls in” coverage policy (H0-6).
• Liability Insurance: The association is required to maintain comprehensive general liability insurance covering all common elements, commercial space owned and leased by the owner’s association, and public ways of the condominium project.
• Fidelity Bond/Fidelity Insurance: New or established projects with more than 20 units are required to carry fidelity bonds/insurance for all officers, directors, and employees of the association, and all other persons handling or responsible for funds administered by the association in an amount equal to three months aggregate assessments on all units plus reserve funds.
• Flood Insurance: Insurance coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program standard of $250,000 per unit, whichever is less. If insuring a residential building, the maximum building coverage is $250,000 times the number of units in the building. The association, not the borrower, is responsible for maintaining adequate flood insurance under the NFIP when the building is located in a Special Flood Hazard Area.
• Determining Need for Flood Insurance: If the property is located in a 100-year flood plain, flood insurance is required. If the project is not located in a 100-year flood plain, it is not subject to the flood insurance requirement if documentation is provided (documentation that includes either a final Letter of Map Amendment or a final Letter of Map Revision).

If My Condominium Association Is Already FHA approved, Do We Need to Take Any Additional Action?

Projects that received FHA approval prior to October 1, 2008, will be required to recertify on or before December 7, 2009.

Projects approved between October 1, 2008, and December 7, 2009, will follow the recertification requirements defined below:

Recertification: Condominium projects will expire within two years from the date of placement on the list of approved condominiums. Further participation in the program after this two-year period has expired will require recertification to determine that the project is still in compliance with the HUD’s Owner-Occupancy requirement and that no conditions currently exist which would present an unacceptable risk to FHA. Items that must be given consideration are:

• Pending special assessments
• Pending legal action against the condominium association or its officers or directors
• Adequate hazard, liability insurance, and when applicable, flood insurance coverage

For Qualified Associations, How Many Units Will FHA Provide Financing For?

Concentration Limits (Temporary) - During the transition period of December 7, 2009, to December 31, 2010, FHA will increase its temporary concentration limits (the percentage of units that it will insure in a project) to 50 percent.

FHA will also consider increasing concentrations up to 100 percent if a condominium project meets additional criteria that include:

• The project is 100 percent complete and construction has been completed for at least one year.
• 100 percent of the units have been sold and no entity owns more than 10 percent of the units in the project.
• The projects budget provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10 percent for the budget.
• Control of the association has been transferred to the owners.
• The owner-occupancy ratio is at least 50 percent. (Bank-owned properties, vacant, or tenant-occupied real estate-owned properties are excluded from this calculation.)

Concentration Limits (Successor) – Beginning on January 1, 2011, or earlier by FHA action, FHA concentrations will revert to the following:

• In projects of 3 or fewer units, FHA will insure no more than 1 unit.
• In projects consisting of 4 or more units, FHA will have no more than 30 percent of the total units encumbered with FHA insurance.
• Calculating the level of FHA concentration in a project declared with legal phases will follow the same methodology as the owner-occupancy requirements.

CAI will keep you updated in the coming weeks as additional information becomes available. Updates will be posted to the “Heads-Up” page on CAI’s Web site. CAI members with questions should call Andrew Fortin, Vice President of Government and Public Affairs, at 703-548-8600, or by e-mail at g&pa@caionline.org, with the subject line “FHA Condo Regs.”

This information and analysis may be reprinted, linked to, or shared provided the following attribution is given: This information is provided courtesy of Community Associations Institute (CAI), a national nonprofit education and advocacy organization that provides education, tools, and resources to association board members, community managers, and other professionals who serve associations. For more information, visit www.caionline.org or call (888) 224-4321.

SUMMARY OF THE DECISION

This issue of trees vs. views was the subject of Eckstrom v. Marquesa at Monarch Beach Homeowners Association (2008) 168 Cal. App. 4th 1111, a recent appellate court decision. Individual homeowners in a common interest development that was comprised of single family homes sued the Marquesa at Monarch Beach Homeowners Association (“Association”) regarding palm trees that had grown to heights exceeding the rooftops and were blocking their views. The CC&Rs provided that all trees on a lot had to be trimmed so as to not exceed the roof of the house unless the tree did not obstruct views from other lots.  The provision further gave the determination of whether trees obstructed views to the sole judgment of the association’s architectural committee.

The Association’s Board (including one member who had over 20 palm trees on his lot) took the position that, because trimming a palm tree would effectively require its removal, the CC&R requirement did not apply to palm trees.  The Board refused to enforce the “view” provision of the CC&Rs against owners who had planted palm trees.  The Board had also adopted a definition of “view” that was very narrowly construed so that it could not apply to require the trimming or removal of palm trees.

The trial court ruled in favor of the individual owners and ordered the Association to enforce its CC&Rs.  The Association argued that its decision to exclude palm trees and define “view” was a business judgment decision and should be given judicial deference, as established in the case of Lamden v. La Jolla Shores Clubdominion Homeowners Assn.  (1999)  21 Cal. 4th 249:

Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions . . . courts should defer to the board’s authority and presumed expertise.

The appellate court rejected the Association’s argument and concluded that Lamden was not applicable.  The Court determined that the Association’s policy of excepting all palm trees was in conflict with the express provisions of the CC&Rs that trees need to be trimmed so as to not obscure views.   The court further ruled that judicial deference also did not apply to new rules enacted by the Board since they rendered the view provision of the CC&Rs meaningless.  The Court also noted that, in this case, the CC&Rs did not give the Board discretion to make a decision that palm trees were not subject to the CC&R provision.

The Association further argued that the judgment of the trial court should not be upheld because it was unclear as to what it was being ordered to do.  In rejecting this argument, the Court of Appeal noted that the Association simply had comply with its obligations imposed under the CC&Rs and exercise its “good faith” discretion” to determine which trees obstructed the Plaintiffs’ views and then undertake the procedures outlined in the CC&Rs to enforce those provisions.  Because the Association had never attempted to determine which palm trees obstructed views, the Court indicated that is where the Association should begin.

IMPACT OF THIS DECISION FOR HOMEOWNERS ASSOCIATIONS

This case is important for homeowners associations because it holds that an Association’s decision which directly conflicts with the CC&Rs will not be upheld.  What is problematic about this case is that the trial court’s definition of the terms “view” and “obstruct” are very broad:

The word “[obstruct] means to block from sight or be in the way of (and thus even one palm frond would block some portion of a view)” and the term “[view] means that which is visible to the naked eye while standing, sitting or lying down anywhere in one’s home, or anywhere on one’s Lot, looking in any direction one wishes.

It should also be noted that this decision does not prevent an Association from amending its view protection provisions.  If your association has view preservation language, it is important to consult with your legal counsel prior to making decisions regarding enforcing or amending the same.

Tritek, a California corporation, was sued by Mak, a shareholder and board member.  During the lawsuit, Mak wanted to review corporate documents that were protected by the attorney-client privilege.  When Tritek’s other directors refused to give Mak the corporate documents, Mak sought relief from the Superior Court.  Tritek objected, claiming the documents fell under the attorney-client privilege.  The Superior Court denied Tritek’s objections and ordered the corporation to produce the documents.  Tritek then sought relief from the Court of Appeal.

A corporate director owes a fiduciary duty of care to the corporation and its shareholders and must serve in good faith in a manner the director believes to be in the best interests of the corporation and its shareholders.  It is generally presumed that directors of a corporation are acting in good faith.  Corporate directors have the absolute right, at any reasonable time, to inspect and copy corporate books, records and documents.  This right represents a legislative judgment that directors are better able to discharge their fiduciary duties if they have free access to information concerning the corporation.

In reviewing this case, the Appellate Court recognized that the right of a director to free access of information is subject to exceptions and may be denied where a disgruntled director announces his or her intention to violate his or her fiduciary duties to the corporation.

Here, because Mak’s lawsuit against Tritek was filed in Mak’s capacity as a shareholder and prior to asking for the corporate records in his role as a director, the Court found that Mak was not a “disinterested” director and therefore the presumption of good faith did not apply.  The Court determined that enforcing Mak’s “absolute” inspection rights was problematic because it would give him access to documents he could not obtain via discovery in the shareholder action.  The filing of the shareholder action made Mak an adversary of the corporation.  In so ruling, the Court stated:

Mak cannot take off his “shareholder’s hat” and swap it for his “director’s hat” and claim an absolute right to access all corporate documents.

The Court of Appeal held that in this situation, a court may properly limit a director’s inspection rights because the director’s loyalties are divided and documents obtained by a director in his or her capacity as a director could be used to advance the director’s personal interests in obtaining damages against the corporation.

This case is important for homeowners associations because it sets forth the premise that a director who is involved in litigation against the association would not have the right to access documents covered by the attorney-client privilege where they could be used to advance the director’s personal interests in obtaining damages against the corporation.  If an association is involved in a dispute with a director and receives a request from the director to review documents subject to the attorney-client privilege, the association should consult its legal counsel regarding whether or not to disclose those documents.