 Good afternoon and welcome to our weekly show, Condo Insider. My name is Jane Sugimura and I'm your co-host on this program. Richard Emory is off island and so I'm going to be doing the show today. And my guest today is Larie McGuire. She's a partner, a law partner at Porter McGuire, Kia Kona and Chow. She's an attorney. She's going to be talking to us today regarding a very important topic. This show is about condo living and issues that affect residents and owners. And today we're going to be discussing board of directors and what do they do. Welcome to the show, Larie. Thank you, Jane. I'm happy to be here. Why don't you tell us about your firm? What do you do? My firm is Porter McGuire, Kia Kona and Chow. And as you may know, we work primarily in the area of condominium and homeowner association law. And probably 80% of our practice deals with condos and homeowner associations. So you know a lot about boards of directors. I know quite a bit, yes. And so a good portion of your job is talking to boards and giving them advice. That's correct, yes, definitely. And so what we're going to be doing today, and hopefully we have in our listening audience, we have new board members and existing board members. And we're going to be talking about what they have to do at every board meeting. And that's making decisions. And really, if you're on a board, what kind of decision making are you involved in? Oh my. If you're on a board, you're going to be involved in every decision that a board would deal with, be it dealing with collection of assessments, possibly replacing or maintaining the common elements, paving a parking lot, replacing a roof, dealing with a homeowner who has maybe an excessive number of pets when you're governing documents allow for one or two pets. So you name it, you're going to be dealing with just about every decision you can imagine. Okay, for a person who's just coming on the board, and if they were to ask you to read, you know, I'm now a new member. I mean, how do I go about making these decisions? I don't know anything about the condominium. That's a very good question. And you know, most board members don't know anything when they come on a board in terms of an association and how an association is run. And the law actually protects board members. They allow board members to comply with a standard known as the business judgment rule. And so long as a board complies with the business judgment rule, then they're safe. They'll be covered. If an owner has an issue and an owner later comes after them with a complaint, so long as the board has complied with the business judgment rule. And so you may ask, what is the business judgment rule? Yeah, that was going to be my question. What is the business judgment rule? OK, to begin with, every board has a fiduciary duty. They actually have four fiduciary duties. They've got a fiduciary duty of diligence to act as a reasonable person would act in the same or similar situation, a recently prudent person, careful person. They have a duty to act in good faith, to act honestly and fairly in dealing with the situation at hand. They have a duty of loyalty. They have a duty to be loyal to the association. In other words, don't act in your own best interests. Don't act in the best interests of your neighbor, of that owner who you're concerned, make it upset if you vote one way. You have to be independent and you act in the best interest of all of the owners of the association. In other words, if you sit on a board, you can't vote with the board president because she or he is the board president. You need to vote, exercise your own independent judgment and you vote accordingly. And how do you do that? That is a great question. As a board, in every situation, in every issue, the first thing you want to do is determine what the facts are. What is the issue? What is the problem? So you enter into a fact gathering mode and talk to other owners, look around. You know, what do you see? What do you hear? What do you smell if there's a problem? But figure out what the facts are. And then you as a board want to come together and discuss those facts and figure out what questions remain unanswered. And then maybe you want to look to an expert to answer those questions. So you want to hire an expert. If it's an accounting problem, a problem with your reserves, you may want to talk to an accountant or reserve specialist. If it's a legal question, you may want to talk to an attorney. But what happens if you're sitting on a board and somebody says, yeah, but that costs money? You know, it's probably cheaper to get that opinion, that expert opinion. It's probably a lot cheaper to do that than to wait and not obtain the necessary information. It's OK for these board members to go out and spend association money to get expert advice or hire consultants to come in and tell them, explain to them about the problem that they're facing. Yes, and here's why. When board members are elected to the board, they are given a position of trust. Owners vote them onto the board because they trust their judgment. They trust their ability to obtain expert information if they need it. They trust their ability to go out and obtain the answers to the questions that they have in order to make the right decision. So how does the board go out and find these experts? I mean, what if you're sitting on the board for the first time? I mean, you don't know any architects or lawyers. So how do you find out who these consultants are and how do you get them to come to the board or give you an opinion? That's a great question. Typically, most associations are managed by property management companies, and we have a number of them here in Hawaii. So the property manager that's assigned to your particular project will typically know who to call. And if they don't, they know who to ask in terms of figuring out who to call. If you're a self-managed association, then you want to get on the internet. And, you know, search around and see, you know, if you've got a plumbing problem, a particular plumbing problem, then go on the internet and see what you can find out in terms of a plumber that addresses this particular problem. But it's important to have somebody come in and explain to you how to address the issue that you're trying to make a decision about. Definitely. Definitely. You don't know that, and nobody expects you to know all the answers. So you do need to get that expert information. So you can then make an informed decision about whatever the issue is. You're going to rely on that expert. And usually these experts, I mean, that you hire like the attorney or the architect, they have their own insurance, right? They've got their own errors and omission. That's correct. So that's another reason. I mean, this way, if there is a mistake, then that expert has insurance that and you can go after that expert. That's true. That's true. Or rather, the owner can go after that expert if necessary. But the expert is the one who's making the decision, ultimately. And then you're relying on that expert. And the board makes a decision based on the expert's opinion. And how would a board member make sure that they're protected? Because it's usually when a claim is made by an unhappy apartment owner or... I mean, it happens a long ways down the line. So how do you protect yourself? I mean, to show that you followed the rules. OK. You want to document everything. You want to document and disclose. So you want to document all along. So for example, you first find out there's a problem. You want to document in your minutes, the board meeting minutes, that you have a problem. Once the board knows a bit more about this, let's say they've hired an expert. An expert has told them what the problem is. They want to document that in the minutes. They may want to do a notice to all the owners. Advising all of the owners. Here's the problem that's risen. Here's how we propose to deal with it. Or maybe we're going to have a special meeting to discuss this particular problem, to apprise all the owners of the status of the problem and what we've done so far to address the problem and what we're considering doing about the problem in the future. So you want to document your decision making, the facts, the issue, and you want to disclose everything to your ownership. What's important about disclosing to the ownership? Oh, that's great. So many times you will have individual homeowners that get upset because they feel that the board is not providing them with all the information or they feel that the board isn't being quite candid with all of the owners. They know what's going on, but they don't want us to know what's going on. They want to make a decision before they tell us there's a problem so then they don't have to listen to our feedback about how the decision should be made. That's why you want to get them involved. You want to have owner engagement because if the owners are engaged in this decision making process, they're going to be more apt to go along with whatever the resolution is and less apt to sue you in the future if there is an issue. But if you have retained the documentation all along in terms of what you did, how you decided the problem, let's say for example, you know that there's a repair that needs to be made. So you're talking about how are we going to fund these repairs, right? So you're going to have a meeting and you're going to figure out, okay, owners, here's the cost of the problem. Here's the overall cost and here are options on how to deal with it. Do we need, how are we going to fund it? Are we going to get a loan? Are we going to have to do a special assessment? If we're going to get a loan to fund it then we've got to have majority ownership approval in order to do that. So all along the way you're involving the owners and that way they feel like they too are a part of this decision. And so that's one of the things that the board really should be involved in. Oh yes. In their decision making process. You bet, definitely. Okay. And you know, you mentioned lawsuits. Do board members get sued? Indeed, they do. Yes, they do. However, if they have complied with the business judgment rule, if they have acted as a reasonably prudent person should have acted under the same or similar circumstances, even if they made the wrong decision, they followed the proper procedure, they made the wrong decision. If they get sued, the court will more likely than not find that they are not liable because they followed the proper procedures. They made an informed decision. So that's even a more important reason to follow the business judgment rule really to protect yourself from getting sued because board members don't get paid, right? No, they don't. No, they don't. They're volunteers. And so the more reason, you wanna do something, you cannot do nothing. If you do nothing and you get sued, chances are your directors and officers, insurance will not cover you. They will cover you if you've complied with the business judgment rule. But if you haven't complied, if you haven't done your due diligence, if you haven't acted in good faith in the best interests of the association and in compliance with your governing documents and the law, then the court may find that you are personally liable for whatever that harm was that was committed or that owner incurred. Wow. Well, we're gonna take a break now and think about this. And then when we come back, Larise gonna give us some examples on how this works, how the business judgment rule works. And so we'll be back. Hello, this is Martin Despeng. I wanna get you get excited about my new show, which is Humane Architecture for Hawaii and Beyond. We're gonna broadcast on Tuesdays, 5 p.m. here on Think Tech Hawaii. Hello, I'm Marianne Sasaki. Welcome to Think Tech Hawaii, where some of the most interesting conversations in Honolulu go on. I have a show on Wednesdays from one to two called Life in the Law, where we discuss legal issues, politics, governmental topics, and a whole host of issues. I hope you'll join me. I'm Jay Fidel, and I'm the host of Research in Minoa, Mondays from 12 to 1, on thinktechawaii.com. Take a look at us and learn about geophysics, learn about planetology, learn about the ocean and earth sciences at UH Minoa. You'll really enjoy it. So come around, we'll see you then. Okay, welcome back. We have with us as our guests, Larry McGuire, and we're talking about the business judgment role. And Larry's been telling us how as a board member, if you follow the business judgment role, that you can minimize your exposure if you are eventually sued by an unhappy homeowner. And one of the things that she emphasized in the earlier part of the program is that you have to do a fact finding. You have to do fact finding. You have to consult with an expert to get an opinion. And you have to talk to your owners and disclose to keep them in the loop as part of the decision-making process. Now you're gonna be giving us some examples to show us how the business judgment role works. Okay, for sure. Here's an example that I think many condominiums are having to deal with today. And one of those are the pipes. Oh, the clay pipes situation? Yes, exactly. And they're corroding from the inside. They're corroding from the inside out. The manufacturer previously issued a warranty telling the owners that these pipes were gonna last 80 years. And they've been in install for, let's say, 40 years. And now we know, we've learned that they are corroding from the inside out. We've had backups in units where they're flooding units. We know about this problem. We're trying to minimize it. What do you, as a board, need to do? Let's look at a situation that is feasible. And that would be, let's say you've got a project and they recently did a spa repair project, a very expensive project. So they took out a loan to pay for that spa repair. And then soon thereafter, their elevator broke down and they had to replace the elevator. And now they've done a special assessment to replace the elevator. Now they've learned about the pipes and they've gotta replace the pipes. And the board, certainly members of the board are saying, we just can't deal with this right now. We don't have the funding to deal with this right now. Can that board just bury their head in sand and ignore it and hope that that problem will go away? Can they? No, no, no, they cannot. If that goes, if there's an issue and let's say those pipes back up and they flood somebody's floor and that board has done nothing, that board's gonna get sued and they're gonna be found intentionally liable because they knew- They're intentionally liable means that they can, it's not covered by insurance. That's right, it's not covered by insurance and they may have to pay for it. And this is for a volunteer person who volunteers for the board, doesn't get paid. That's right. And if they make a bad decision, they could be personally liable and pay for it out of their own pocket. That's right. I mean, when you are elected to the board, you are elected knowing that you're gonna be making decisions. If you don't wanna make decisions, do not sit on that board. So in this particular case, what this particular condominium should do, what the board should do, the first thing they need to do is assess the problem. So they wanna talk to homeowners. They wanna talk to other residents to find out what's going on in that particular unit. Gather all the facts then the board's gonna meet and make a determination, okay, how bad is this problem? Obviously, we aren't experts. We aren't plumbers, we don't know. They need to hire a plumber or someone like architectural diagnostics. Somebody who is into forensics, they can look and see what the actual problem is, possibly drill into the pipes and look into it. So they wanna hire an expert. Once they've got that expert, then they're going to want to have that expert draft up specifications that they can then put it out to bid and make a determination what are we dealing with financially? What's the cost and how are we gonna fund it, okay? And once they've done that, they need to get their owners involved. They need to get the owners involved, tell the owners exactly what's happening. You know, we've got the spa project, we've obtained a loan, we've got the elevator, so we've already done a special assessment. We cannot afford, we cannot afford another special assessment and we can't take out a loan yet. So before the board decides they're going to do nothing, they need to make an informed decision and say, okay, look, this is how bad the problem is. We've now hired an independent contractor. They've gone in, they've actually looked at some of the pipes. We now know what area is the worst, what area can last a little bit longer. We know how much time we have before we absolutely have to replace these pipes, right? So they do all of that. They get the board fully informed, the board has made a decision, okay, this is what we're going to do. They've met with all the homeowners. They've talked to the homeowners about the scope of the problem. They tell the homeowners, okay, we can't do anything about it right now. We are going to start putting away some money now in our reserves so that we can have some money set aside when we start to do this replacement. And we're documenting the fact that we're not going to do anything until let's say 2018, once our loan is paid down somewhat. So we are doing something. We are doing something. We're aware of the problem. We know the extent of the problem and we're doing our best to address it now. They've acted within the scope of their business judgment. So if next year a pipe breaks and it does flood somebody's unit and that owner sues the board because they didn't replace those pipes sooner, the board can look back. They've got their minutes documenting what they've done. They've got a copy of the notice that they sent out to everybody or the second notice and the third notice, making sure their owners are fully informed about what they need to do. And the court would look at that and say, you know, I understand that there was damage here. However, this board acted within the standard of its business judgment and they're not liable. Okay, well, that's good to know. I mean, because that's very stressful when you're sitting on the board and all these problems seem to multiply. In fact, you know, with the buildings right now, there's so many people, many of these buildings are old. So everything is failing or it's deteriorating to the point where it seems like every day you turn around, there's one other component that's failing and needs to be fixed or repaired or replaced. And it means another big expenditure. And you know, so the boards are, you know, I know that many of them are in a quandary as to where, how are we gonna do this and where we're gonna get the money and how do we explain it to our owners? Well, you've got to do the best you can. You need to become informed, like I said. And basically this procedure that I've laid out, you would want to go through that procedure on just about every issue. You may not need to have an expert draft specifications for you. You may not need to put it out to bid, but often you are gonna need to obtain an expert opinion on how to deal with something because you as a board member, let's say you work at, you know, Hawaii Intel or, you know, you have various jobs, but you're not an expert. You're not an architect. You're not an engineer. You're not a reserve specialist. And that's why you have experts that you can turn to and question. Definitely. Okay, and as part of the board's fiduciary duty, how often, I mean, when do they have to tell? Tell the unit owners. I would say tell them as soon as they know. As soon as they know something, tell them what they know initially. Like I said, I mean, this isn't a big secret. It shouldn't be a secret. Whatever the problems that the board has, those same problems belong to the owners. The board, you represent the owners. The owners have elected you. They put you in a position of trust. It's your job to keep them informed. And I know numerous boards, they don't wanna tell the owners because they fear the complaints that they may get from the owners or they worry about the owners are gonna tell them what they think about how they should repair this particular issue. And that may be true, but it's much more important that they disclose and document everything. You know, are there any, can you think of another example for that would illustrate this business judgment role besides the repair situation? Yes, you bet. Let's talk about collecting maintenance fees. So many times a board does not wanna collect delinquent maintenance fees because maybe this person's your neighbor or you know them, they're down the hall. I mean, these are people that live near and around you. And you know, now you're being placed to be put in the position of a debt collector, right? Well, you know, you also have expenses. The board has a budget. They know the money's coming in, they know the money's going out. And it's their job to make sure they've collected on these assessments. So even though it's not a pleasant thing to do, they need to make sure that they move forward. I can tell you so many times our firm has been, we've been referred certain matters where the debt is already exorbitant before it even gets to us. And you know, by that time, homeowners, if the debt is so high, they absolutely can't deal with it. And so they may not. But if you've addressed that debt early on before the particular owner owes thousands of dollars, then you're going to be in a better position to be able to deal with that person such that they can pay off that debt. And then the association can pay its bills because they're collecting timely, timely actions are the most important. Don't delay because you don't want to deal with something. Act timely. And with respect to collections, I mean, everybody who sits on the board, I mean, most of them live in the project. So you're dealing with neighbors and people that they may know. So, I mean, they can't let that interfere with their decisions. No, they can't, they can't. And oftentimes the board, they are concerned about the neighbor who's going to come and talk to them. Who's going to ask them, can you please give me a payment plan or work out something with me? Well, you as an individual on the board, you have no authority. Only the board as a group can act. And the board should act as a group. I would recommend that you have a billing policy where you have a policy as to how you're going to deal with these particular owners. So that you're not dealing with each situation individually. There is a process. And the process would be that, you know, after the, you know, when you're late once and the management company will send out a letter, maybe they'll do it two times before it gets sent to legal. And at some point it gets sent to legal quickly before this amount starts to mushroom. Exactly, but have a policy in place. I mean, there are different policies, but you as a board need to make a determination of what's best for your association. Have that policy and then you want to follow it as to everybody. Because if you don't, then you're gonna get hit with a discrimination claim. Because let's say you allow this owner to have a five year payment plan. This owner has a six month payment plan. This owner's allowed a one year payment plan. You can't have different payment plans for different people. So there again, you want to become informed. You know, what is the status of your delinquencies? Get together as a board. Make a decision of how you're going to address it. Have a written policy. Draft a resolution, which is something that boards have in writing to document the various policies that they make. And that's also a historical record so that subsequent boards can look back to see how the board dealt with a particular issue in the past. And then owners can look at that and say, hey, okay, now I see there is this 12 month payment plan policy. The board implements it across all owners. It's not just me. So I understand, okay, I will implement this 12 month payment plan. And so if you have a collection or a billing policy, that also makes decision making easier because it's not like you have to make a special decision for this one unit order. I mean, it is if they owe the association money and this is what the process is and then you get into a payment plan and this is how you pay it back. Exactly, exactly. And that way, the attorney who works for the association doesn't have to come to the board every time there's an issue and every time they have to make a decision about a particular payment plan. That way, because you folks are busy. People on boards are busy. They don't have time to have a call from the property manager every day about a different issue. So you wanna have policies in place to where your business can run smoothly. The business of running the association can go smoothly. Well, geez, thank you so much for being with us. Thank you. And I'm sure we're gonna have to have you back because we're not finished with the topic, but thank you very much. And thank you for joining us. Next week, we're gonna have somebody from the Hawaii Civil Rights Commission to talk about housing discrimination. So I hope you can join us on Condo Insider. See you next week. Thank you.