Legal Update: Parth – Trial Court Decision
Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268
Case Summary
In 2016, the Court of Appeal released its opinion in Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal. App. 4th 268, causing much discussion in the common interest development industry. The Court of Appeal reversed the trial court’s grant of summary judgment in favor of defendant Erna Parth, finding that there was a material issue of fact whether Mrs. Parth “acted in an informed basis and with reasonable diligence” and was therefore protected from liability by the “Business Judgment Rule.” The Court of Appeal reviewed the alleged actions taken by Mrs. Parth, which included authorizing contracts, hiring an unlicensed contractor, signing promissory notes, and terminating the management company, all without board approval. She also signed a contract with a security company even though the Board had voted to obtain bids from other security companies. The Court of Appeal remanded the case to the trial court for further proceedings.
On October 9, 2018, following a 25 day court trial, the Superior Court, the Honorable James T. Latting, Judge Presiding, issued its ruling in favor of Mrs. Parth.
Judge Latting first noted that Mrs. Parth is 89 years old and a former volunteer member of the Board, which consisted primarily of retirees; that Mrs. Parth had no formal training to serve on the Board of Directors and did not have a business background. During her service on the Board, the Association employed professional management, and the Association had legal counsel the entire time she served on the Board.
Expert testimony for both the Association and Mrs. Parth indicated that it was “custom and practice” for boards to rely on professional management, in particular managers holding the CCAM designation, for advice on issues such as whether the Board was in violation of the governing documents, or whether a legal opinion should be sought. The three managers assigned to the Association between 2005 and 2001 all held the CCAM designation. Mrs. Parth also relied on director ApRoberts, a CPA, regarding the Association’s financial affairs.
With regard to the allegations that Mrs. Parth acted unilaterally and without approval, the court found that the Association did not present supporting evidence. Mrs. Parth did not unilaterally hire Warren Roofing; she was one of five directors who made that decision. She relied on management to review and approve invoices for the work, which it was obligated to do under the management contract. Similarly, Mrs. Parth did not unilaterally sign loan documents; the loans were approved by the Board, and there was no evidence that management advised that a vote of the members was required, or that legal counsel should review the loan documents.
The court also found that Mrs. Parth did not unilaterally retain Jesse’s Landscaping and did not unilaterally process payments; instead the management company did so. And there was no evidence that Mrs. Parth unilaterally fired the management company.
Finally, as to the patrol contract Mrs. Parth signed that prompted the lawsuit, the court found that Mrs. Parth believed she was merely renewing the contract, not “entering a new deal,” and that she signed at the request of the manager.
Based on the evidence presented, the court concluded that Mrs. Parth did not act in bad faith, or in her self-interest, and was protected by the Business Judgment Rule and the indemnification provisions in the governing documents.
Takeaway
Despite the outcome in the trial court, the 2016 Parth opinion provides a lesson in how to comply, or not comply, with the Business Judgment Rule. The trial court decision is not legal precedent, but makes it clear that board members are entitled to and should reasonably rely on the advice and recommendations of managers and the management company as experts.
