Independent contractor versus employee

 

 Not all workers are employees as they may be volunteers or independent contractors. Employers often improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance and are not liable for payments under unemployment insurance, disability insurance, or social security.

The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.

There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq., or performs services for a person who is required to obtain such a license, the worker is an employee and not an independent contractor. Labor Code Section 2750.5

 

How do I know if I am an employee or an independent contractor?
There is no set definition of the term “independent contractor, ” and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357.  This is a rebuttable presumption, however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:

  • 1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  • 2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  • 3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  • 4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  • 5. Whether the service rendered requires a special skill;
  • 6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  • 7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  • 8. The length of time for which the services are to be performed;
  • 9. The degree of permanence of the working relationship;
  • 10. The method of payment, whether by time or by the job; and
  • 11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)

Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)

 The person I work for tells me that I am an independent contractor and not an employee. He does not make any payroll deductions or withholdings for taxes, social security, etc., when he pays me, and at the end of the year, he provides me with an IRS form 1099 rather than a W-2. By paying me in this manner, does it mean I am automatically an independent contractor?
No. The fact that a person who provides services is paid as an independent contractor, that is, without payroll deductions and with income reported by an IRS form 1099 rather than a W-2, is of no significance whatsoever in determining employment status. Your employer cannot change your status from that of an employee to one of an independent contractor by illegally requiring you to assume a burden that the law imposes directly on the employer, that being, withholding payroll taxes and reporting such withholdings to the taxing authorities.
Does it make any difference if I am an employee rather than an independent contractor?
Yes, it does make a difference if you are an employee rather than an independent contractor. California’s wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), and anti-discrimination and retaliation laws protect employees, but not independent contractors. Additionally, employees can go to state agencies such as DLSE to seek enforcement of the law, whereas independent contractors must go to court to settle their disputes or enforce other rights under their contracts.
When I started my current job, my employer had me sign an agreement stating that I am an independent contractor and not an employee. Does this mean I am an independent contractor?
No. The existence of a written agreement purporting to establish an independent contractor relationship is not determinative. The Labor Commissioner and courts will look behind any such agreement in order to examine the facts that characterize the parties’ actual relationship and make their determination as to employment status based upon their analysis of such facts and application of the appropriate law.
How can it be that the Labor Commissioner determined I was an employee with respect to a wage claim I filed and won, and the Employment Development Department (EDD) determined I was an independent contractor and denied my claim for unemployment insurance benefits?
There is no set definition of the term “independent contractor” for all purposes, and the issue of whether a worker is an employee or independent contractor depends upon the particular area of law to be applied. For example, in a wage claim where employment status is an issue, DLSE will often use the five-prong economic realities test to decide the issue. However, in a separate matter before a different state agency with the same parties and same facts, and employment status again being an issue, that agency may be required to use a different test, for example, the “control test,” which may result in a different determination. Thus, it is possible that the same individual will be considered an employee for purposes of one law and an independent contractor under another.
As an employer, what obligations do I have to purchase Workers’ Compensation Insurance or comply with other labor laws for persons classified as independent contractors?
Employers often improperly classify their employees as independent contractors to avoid paying payroll taxes, minimum wage or overtime, or complying with other wage and hour requirements such as providing meal periods and rest breaks, etc.  Additionally, employers do not have to cover independent contractors under Workers’ Compensation Insurance.  However, because potential liabilities and penalties are significant, it is important that each working relationship be thoroughly researched and analyzed before classifying an individual as an independent contractor and not an employee.  You should understand that the DLSE presumes that the worker is an employee (Labor Code Section 3357).  However, the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors which must be considered. Consequently, it is necessary to closely examine the facts of each relationship and then apply the law to those facts. The most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker, the work to be done and the manner and means in which it is performed.
What can I do if I believe my employer has misclassified me as an independent contractor and as a result am not being paid any overtime?
You can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner’s Office), or you can file an action in court to recover the lost overtime premiums. In both situations, it will first be necessary to determine your employment status, that is, employee or independent contractor, before the issue of overtime can be addressed and decided. Additionally, if it is determined that you are an employee and you no longer work for this employer, you can make a claim for the waiting time penalty pursuant to Labor Code Section 203.  Eligibility for this penalty is dependent upon your employment status, as independent contractors are ineligible for the waiting time penalty.
What is the procedure that is followed after I file a wage claim?
After your claim is completed and filed with a local office of the Division of Labor Standards Enforcement (DLSE), it will be assigned to a Deputy Labor Commissioner who will determine, based upon the circumstances of the claim and information presented, how best to proceed. Initial action taken regarding the claim can be referral to a conference or hearing or dismissal of the claim.

If the decision is to hold a conference, the parties will be notified by mail of the date, time and place of the conference. The purpose of the conference is to determine the validity of the claim and to see if the matter can be resolved without a hearing. If the claim is not resolved at the conference, the next step usually is to refer the matter to a hearing or dismiss it for lack of evidence.

At the hearing, the parties and witnesses testify under oath, and the proceeding is recorded. After the hearing, an Order, Decision, or Award (ODA) of the Labor Commissioner will be served on the parties.

Either party may appeal the ODA to a civil court of competent jurisdiction. The court will set the matter for trial, with each party having the opportunity to present evidence and witnesses. The evidence and testimony presented at the Labor Commissioner’s hearing will not be the basis for the court’s decision. In the case of an appeal by the employer, DLSE may represent an employee who is financially unable to afford counsel in the court proceeding.

What can I do if I prevail at the hearing and the employer does not pay or appeal the Order, Decision, or Award?
When the Order, Decision, or Award (ODA) is in the employee’s favor, and there is no appeal, and the employer does not pay the ODA, the Division of Labor Standards Enforcement (DLSE) will have the court enter the ODA as a judgment against the employer. This judgment has the same force and effect as any other money judgment entered by the court. Consequently, you may either try to collect the judgment yourself, or you can assign it to DLSE.
What can I do if my employer retaliates against me because I thought I was misclassified as an independent contractor and objected to not being paid overtime?
If you are an employee and your employer discriminates or retaliates against you in any manner whatsoever, for example, he discharges you because you question him about your employment status, or about not being paid overtime, or because you file a claim or threaten to file a claim with the Labor Commissioner, you can file a discrimination/retaliation complaint with the Labor Commissioner’s Office. In the alternative, you can file an action in court against your employer. If on the other hand, it is determined that you are in fact an independent contractor, DLSE cannot assist you as it does not have jurisdiction over independent contractors, and you would have to go to court to enforce your rights.

 

Trivial Defects Law

Many people are injured when they trip and fall over a rise in the sidewalk or other defect on public or private (Association) property. The “trivial defect rule” dictates that the property owner (Association) is not liable for injuries sustained by an individual on the premises if reasonable people would conclude that the defect that caused them to fall was “trivial.”

TRIVIAL DEFECT RULE:

  • A vertical change in elevation of a walkway one inch (1”) or less (or possibly 1.5 inches or less) alone is generally trivial defect as a matter of law unless the totality of circumstances, i.e., other aggravating surrounding factors, indicates otherwise.
  • A trivial defect is one that does not pose a substantial risk of injury to a person properly using the area for the purpose intended.
  • A property owner (Association) is not liable for damages caused by a minor, trivial, or insignificant defect in his property.
  • This principle is sometimes referred to as the “trivial defect defense,” although it is not an affirmative defense but rather an aspect of duty that plaintiff must plead and prove.
  • Persons who maintain walkways or other areas—whether public or private—are not required to maintain them in absolutely perfect condition.
  • The duty of care imposed on a property owner, even one with actual notice, does not require the repair of minor defects.
  • Some defects are bound to exist even in the exercise of reasonable care in the maintenance of property and cannot reasonably be expected to cause accidents.
  • Whether a condition is dangerous is almost always considered a question of fact that may be resolved as a question of law only if reasonable minds can come to but one conclusion. If reasonable minds could differ as to whether the condition was dangerous or defective, then such defect could not be considered trivial as a matter of law.
  • When the size of the depression begins to stretch beyond one inch, the courts have been reluctant to find that the defect is not dangerous as a matter of law.

TOTALITY OF SURROUNDING CIRCUMSTANCES LIMITATION OF TRIVIAL DEFECT RULE:

California does not classify defects as trivial or substantial according to a tape measure test – the mere depth or height of the defect in comparison to the rest of the sidewalk. Instead, courts look to the totality of the circumstances, which include:

  • [1] The physical characteristics of the defect (i.e., size, jagged edges, broken pieces, exposed rebar),
  • [2] The setting (lighting, weather, other factors affecting visibility), and
  • [3] History (plaintiff’s familiarity with the area, any previous injuries attributable to the defect).

Tape Measure Test (1” to 1-1/2” or less) is not the only factor.

Surrounding Aggravating Circumstances:

  • Although the size of a crack or pothole is a pivotal factor in the determination, a tape measure alone cannot be used to determine whether the defect was trivial.
  • Instead, the court should determine whether there existed any circumstances surrounding the accident rendered the defect more dangerous than its mere abstract depth would indicate.
  • Obviously, no fixed measurement in inches of height, depth, or width of an obstruction or depression can be adopted or established as a standard because a determination of whether a condition is trivial or not depends upon all of the circumstances surrounding the existence of the conditions in the particular case. Therefore, it is incumbent to review the evidence and determine whether in the light of all of the surrounding circumstances the defect was minor or trivial as a matter of law.
  • The size of the defect is only one circumstance to be considered, as no court has fixed an arbitrary measurement in inches below which a defect is trivial as a matter of law and above which it becomes a question of fact whether or not the defect is dangerous. All of the circumstances surrounding the condition must be considered in the light of the facts of the particular case.
  • California Building Code requires beveled slopes of no greater than 50% for changes in elevation from 1/4″ to 1/2″.  If the change in elevation is greater than 1/2″ then have to use a curb ramp.
  • Thus, the sidewalk trip and fall cases in California against private property owners (premises negligence) and municipalities (dangerous condition of public property), “trivial” defect as a matter of law typically has been held to be 1 to 1.5” inches or less, but this can vary according to the other surrounding circumstances.
  • Court considers whether walkway had broken pieces, jagged edges, debris or grease or water concealing the defect, and the lighting of the area, conditions obstructing plaintiff’s view, among other things.
  • Where aggravating circumstances or facts were present where the defect goes beyond a mere depression between two adjoining slabs and consists of potholes, jagged breaks and cracks or also contains the presence of foreign substances such as grease and oil, then it cannot be said that the defect is trivial and minor as a matter of law
  • The court should also consider the weather at the time of the accident, a plaintiff’s knowledge of the conditions in the area, whether the defect has caused other accidents, and whether circumstances might either have aggravated or mitigated the risk of injury.
  • An otherwise vertical trivial rise in the sidewalk may be considered dangerous if a horizontal gap is likely to trap the shoes of pedestrians whose feet strike the.

Cumulative Dangers (instead of isolated defect):

  • If the defect that causes injury is merely a part of a broader, cumulative dangerous condition caused by the defendant, the trivial-defect doctrine does not apply.
  • Where an entire sidewalk area is in a broken, dilapidated and fragmented condition so that pedestrians using it must undergo the hazards of many inequalities, any one of which might cause a fall, the reason behind the rule should cease to operate. An isolated minor defect may be so trivial, that though it creates a peril to pedestrians using it, the Association as a matter of public policy may not be held liable to repair it. An entire sidewalk crumbling and falling apart is an entirely different matter, and the city should not be entitled to ignore the cumulative perils presented by its generally fragmented condition.

Admission of Danger by Defendant:

  • Licensed contractor or inspector testimony that sidewalk defect as depicted in photographs was hazardous precludes finding that defect trivial as a matter of law.
  • The contractor or inspector admitted that if he had seen a condition of the sidewalk such as that testified to and pictured in the photographs, he would have considered it hazardous and as requiring a correction of the defect or condition. In view of that evidence, it cannot be said as a matter of law that the defect was such a minor defect to be insufficient to impose liability upon the Association for injuries resulting therefrom.
  • If defendant admitted its own negligence in failing to repair the hole its liability necessarily follow.

Dispute about depth, nature, or surrounding circumstances of defect:

  • Photographs: A defect is not trivial as a matter of law if reasonable minds can differ as for whether or not photographs correctly depict the alleged defect and its surrounding circumstances.
  • If alleged defect’s size is factually contested, the probative value of photographs ought to be submitted to the jury.

HOW THE COURT ANALYZES THE TRIVIAL DEFECT ISSUE:

  • An initial and essential element of recovery for premises liability under the governing statutes is proof a dangerous condition existed. Trivial (Not Dangerous) as a Matter of Law:
  • The doctrine permits a court to determine whether a defect is trivial as a matter of law, rather than submitting the question to a jury.

Summary Judgment:

  • Where reasonable minds can reach only one conclusion—that there was no substantial risk of injury—the issue is a question of law, properly resolved by way of summary judgment.

Rationale for the Rule:

  • The rule which permits a court to determine ‘triviality’ as a matter of law rather than always submitting the issue to a jury provides a check valve for the elimination from the court system of unwarranted litigation which attempts to impose upon a property owner what amounts to absolute liability for injury to persons who come upon the property. A landowner or Association is not an insurer of the safety of its users.

Order and Steps of Courts Analysis:

The legal analysis involves several steps.

  • First, the court reviews evidence regarding the type and size of the defect.
  • If that preliminary analysis reveals a trivial defect, the court considers evidence of any additional factors such as the weather, lighting and visibility conditions at the time of the accident, the existence of debris or obstructions, and plaintiff’s knowledge of the area.
  • If these additional factors do not indicate the defect was sufficiently dangerous to a reasonably careful person, the court should deem the defect trivial as a matter of law and grant judgment for the landowner or Association.

 

 

 

 

 

 

 

Inherent Unfairness of Special Assessments

One way of funding reserves and capital expenditures is by special assessments — when money is needed, current owners contribute the funds. Several complications exist with special assessment funding:

Owner Vote is Required

  • The board may not have the authority to approve a special assessment and must obtain a vote of the owners. This could make securing approval for a special assessment difficult.

     They are Unfair

  • A special assessment impacts only current owners – it does not impact future owners, which may reap the benefit of projects funded by the assessment.
  • Current new owners that have not yet enjoyed the facilities are forced to pay for those that have already benefitted from the facilities but have already sold their units.

Hard to Collect

  • At any given point in time, a certain number of owners are unable to pay a special assessment because of divorce, job loss, disability, illness, or other valid reasons.
  • The result is the same: cash flow problems for owners means cash flow problems for the Association.
  • The Association can file a lien against the delinquent owners or even foreclose their units, but the money is still not available when needed.

     Short Term Thinking Syndrome

  • Associations with large number of seniors often have little interest in investing in long range planning, paying for capital items, or properly funding the Association’s reverse account.
  • Many owners see reserves as paying for a benefit they will never enjoy. Reserve funds are used to pay for assets that are used up bit by bit every single day.
  • When collected monthly, in the form of a regular assessment, reserve contributions pay only for projects from what the current (and not future or past) owners derive benefit.
  • Paying into reserves is like refilling the gas tank of a rental car – you put back only as much as you have used.
  • You do not want to pay for repairs and improvements that you will not “use up” fully while living in the unit – you should not pay for projects that provide enjoyment and benefit for other owners (future or previous owners).
  • Why should you pay for someone else’s future roof?
  • Fairly allocated reserve funds do not pay for someone’s future benefit. They only pay for the portion of the reserve components that current owners used up – no more, no less. With the fair funding approach, each owner pays into reserves only an amount needed to replace what they personally benefitted from, whether it is one year’s or ten years’ worth.
  • Do not be fooled by the “we’ll pay later” arguments. Paying later shifts financial responsibility to others that do not owe the money, and the board will surely be faced with raising an unpopular and maybe uncollectible special assessment.
  • To keep reserve funding fair, all owners should pay a fair share of reserve funding needs. Paying less than a fair share puts the burden on others in the future to make up the difference.
  • With a reserve plan funded with regular contributions, each member contributes his or her fair share based on the time of ownership. For example, if a member owns a unit for three years, he pays for 3 of the 30 years of the improvement’s useful live; one that owns a unit for two years only pays for 2 of the 30 years. There are no gaps in contributions, and all owners pay equally.
  • The money is available when needed, and the board knows when to spend it.
  • All reserve fund contributions should come from regular assessments – just like income taxes are paid as earned, reserve fund contributions should be made at the rate the assets of the Association are being used up or consumed by its owners.
  • Advance planning is crucial.

Consider the following common scenario:

Roof cost: $40,000

Useful life of the roof: 25 years

Number of units in the project: 15

Cost of roof use or consumption (depreciation) per unit per day: $0.30 ($40,000/25/15/360)

Every owner “uses up” (benefits from or enjoys) 30 cents’ worth of roof each day.

  • Owner David purchased his unit from Robert two months after a new roof was installed on the building.  There was a special assessment of $2,670 levied against each owner, including Robert, to cover the cost of the roof.  Robert paid for 25 years of roof use but enjoyed the roof for only two months.
  • David did not have to pay the assessment but enjoyed the use of the roof for more than 24 years for free before selling his unit to Roger, just before the existing roof reached its expected useful life twenty-five years later.  David never paid a penny for the use of the roof, which protected his unit practically during the roof’s entire useful life.
  • Now, a new roof needs to be installed on the building.  Roger pays a special assessment of $2,670 for the new roof that is expected to last for another 25 years.  One year later, Roger sells his unit to Mark . . . .
  • Roger used the roof for just over a year but paid for 25 years’ of use.  Mark gets a free ride on the roof.
  • Sharing Fairly. Future repair costs must be accurately predicted. Since current owners are “using up” common area assets, owners should share fairly in the cost to repair or to replace them. If all owners contribute their fair share as part of their regular assessment, there will be no more special assessments.
  • Funding reserves by way of regular contributions, which are built into the regular assessment of each owner, as opposed to special assessments, is the fairest way to address reserve fund needs.
  • Special assessments penalize those that have to pay them since former owners were able to use common area assets without contributing their fair share to the cost of rebuilding those assets or of creating new common area assets as capital improvements.

Civil Harassment

Background

  • Sometimes, neighbor-to-neighbor or board-to-owner disputes escalate into emotional campaigns of harassment.
  • A person who suffers harassment from a neighbor or from the board of directors may seek a temporary restraining order and an injunction prohibiting the harassment.
  • The statute authorizes a person who has suffered harassment to use an expedited procedure to obtain the injunction. The statute was designed to provide a quick and simple procedure by which this wholly unjustifiable conduct, having no proper purpose, could be enjoined.  The statute is limited to protecting only those who have suffered “substantial emotional distress” caused by conduct that “serves no legitimate purpose.”
  • Many owners upon receiving repeated, or even just one, violation notices or warnings from the board of directors claim that they have been harassed by the board and throw the term harassment around rather loosely and indiscriminately.
  • Such owners are inclined to label the board’s legal duty to enforce the Association’s governing documents as a harassment and even threaten the board with legal action if the harassment (justified and necessary enforcement effort) does not forthwith cease.

Harassment Defined

The elements of unlawful harassment are as follows:

  1. To be engaged in a pattern or course of conduct the intent of which is to harass another person. The injured person must support his or her allegations with independent corroborating evidence.
  2. The conduct serves no legitimate purpose;
  3. The conduct would cause a reasonable person to suffer substantial emotional distress and actually causes substantial emotional distress to the affected person;
  4. Because of the pattern or course of conduct, the person reasonably feared for his or her safety or for the safety of an immediate family member.
  5. That is not a constitutionally protected activity.
  • The harassment must be found and supported by clear and convincing evidence before future conduct may be enjoined.
  • The conduct must be ongoing, and a single incident of harassment is not a “pattern or course of conduct,” entitling the applicant to injunctive relief.

Harassing Conduct Defined

Harassing conduct may include any of the following:

  1. Verbal harassment, such as obscene language, demeaning comments, slurs, or threats;
  2. Physical harassment, such as unwanted touching, assault, or physical interference with normal work or movement;
  3. Visual harassment, such as offensive posters, objects, cartoons, or drawings;
  4. Unwanted sexual advances.

The legal term “harass” means a knowing and willful pattern or course of conduct directed at a specific person which seriously alarms, annoys, torments, or terrorizes the person, and which serves no legitimate purpose. The pattern or course of conduct must be such as would cause a reasonable person to suffer substantial emotional distress, and must actually cause substantial emotional distress to the person.

  1. Notices sent to owners for violating the Association’s governing documents do not constitute harassment – they may only bother, annoy, irritate, or anger the affected violators.
  2. The “harassing” violation notices or warnings serve a legitimate purpose: to encourage or to force the violators of the governing documents or of applicable law to cease the violation.
  3. The notices are not sent with the specific intent to cause substantial, or any, emotional distress to the affected person or to cause fear for his or her personal safety.
  4. Board of Directors may not be found guilty of harassment for enforcing or for trying to enforce the Association’s governing documents or applicable law while following legally allowed and accepted enforcement methods.
  • A board member may not discuss or try to enforce governing document violations outside a legally convened board of directors meeting.
  • A board member may not accost or approach a violator on or off the property, informing him that his conduct violates the Association’s governing documents, for such behavior constitutes an ultra vires act – it lies beyond the board member’s corporate powers.  Corporate powers may be invoked and exercised only during a board of directors meeting and not outside of a meeting.
  • All violation notices and warnings must be approved by a simple majority of the board of directors at a properly called board of directors meeting and be sent to the violators by written communication, preferably by first-class or certified mail.
  • Individual board members should not handle violators single handed, bypassing required board approval and proper channels communication.

Owner vs. Board of Directors

  • It is appropriate for individual board members being harassed to use association funds to fight back by having the association’s attorney write letters to the offending owners or represent the board member(s) in civil proceedings. This is an appropriate use of association funds, for two reasons:
  1. The board members are being harassed because of their actions as board members.
  2. The harassing behavior is preventing them from doing the job for which they were elected, which makes the harassment an association issue and a legitimate association expense.

Owner vs. Owner

  • Normally, the board should let owners embroiled in personal conflicts work out the conflicts for themselves unless the harassment involves illegal discrimination based on race, color, religion, sex, handicap, familial status, or national origin, ancestry, marital status, age, sexual orientation, source of income, or medical condition—all specifically protected categories under federal and California fair housing laws. Associations have an affirmative obligation to intervene and could be charged with violating fair housing laws if they fail to do so.
  • When dealing with owner vs. owner harassment charges, the board should first verify the complaint – get copies of any abusive letters, e-mail messages, or tapes of abusive phone calls. If the behavior occurs in person, have a third party, the manager or one or more board members, witness the threatening behavior.  The board should then follow the steps outlined below:
  1. Have the board’s attorney send a letter to the offending owner describing the offending behavior and insisting it must stop.
  2. Impose sanctions if the behavior continues.
  3. Offer to mediate the dispute or suggest that the owners seek third party mediation services.
  4. Seek a civil restraining order against the owner if the harassment continues.
  5. Document all the intervention measures to demonstrate the board’s good faith efforts to deal with the problem.
  • “Harassment” is difficult to remedy—nothing an association can do will turn owners into nice or pleasant residents.
  • However, if the level of harassment rises to physical violence or unlawful discrimination, the Association may be held liable. An association has standing (legal authority) to seek an injunction against a unit owner to prevent future acts of physical violence, or threats of violence, against the association, its directors, employees, and residents.
  • In at least one case, an association paid more than a half-million dollars to settle a case in which an African-American unit owner claimed that the board did nothing to protect her from the racial and sexual slurs, derogatory comments and physical threats of another owner.

 

 

 

Proof of Lost Profits

Although lost profits are recoverable in an action for a tort or breach of contract, extra care must be taken to ensure that a jury is not misled or confused. Both bench officers and attorneys handling these types of cases must be cognizant of the basic rules that govern admissibility of expert opinions on lost profits.

The objective of this article and self-study test is to explain the cases and statutes that discuss evidence of lost profits in civil cases. Readers will learn about expert opinions regarding old and newly established enterprises, how to take competition into account, and the qualifications needed to provide expert testimony in this field.

Writing more than 30 years before Daubert v. Merrill Dow Pharmaceuticals Inc., 509 US 579 (1993), as well as before analogous California authority, Judge Henry J. Friendly, in upholding the exclusion of the plaintiff’s expert testimony with regard to lost profits, noted that it was especially important to protect juries against expert testimony containing “an array of figures conveying a delusive impression of exactness in an area where a jury’s common sense is less available than usual to protect it.” Herman Schwabe Inc. v. United Shoe Mach. Corp., 297 F2d 906 (1962).

What are the matters upon which an expert may rely in rendering an opinion? What assumptions have been held to be improper?

In all cases, the proponent of the expert’s testimony must comply with Evidence Code Section 801(b), which sets forth three separate but related tests that a matter must meet to serve as a proper basis for an expert’s opinion. First, the information used must come from the witness’ personal observation, the witness’ personal knowledge, or an assumption of facts finding support in the evidence. Second, the matter on which the opinion is based must be of a type on which the expert may reasonably rely. Third, an expert may not base his opinion on any matter held to be improper as the basis of expert opinion by constitutional, statutory, or decisional law. Pacific Gas & Elect. Co. v. Zuckerman, 189 CA3d 1113 (1987); In re Marriage of Hewitson, 142 CA3d, 874 (1983). Proof of lost profits implicates all three Evidence Code Section 801(b) prongs.

When the operation of an established business is prevented or interrupted, such as by a tort or breach of contract or warranty, damages for the loss of prospective profits that otherwise might have been made from its operation are generally recoverable. The profits’ occurrence and extent may be ascertained with reasonable certainty from the past volume of business and other provable data relevant to the probable future sales. Grupe v. Glick, 26 C2d 680 (1945). “Lost profits to an established business may be recovered if their extent and occurrence can be ascertained with reasonable certainty; once their existence has been so established, recovery will not be denied because the amount cannot be shown with mathematical precision.” Berge v. International Harvester Co., 142 CA3d 152 (1983).

“[T]he determination of lost profits of a new business presents problems of proof. It has been frequently stated that if a business is new, it is improper to award damages for loss of profits because absence of income and expense experience renders anticipated profits too speculative to meet the legal standard of reasonable certainty.” Shade Foods Inc. v. Innovative Prods. Sales and Mktg. Inc., 78 CA4th 847 (2000). If the business is new or speculative, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like. When a tortfeaser has prevented the beginning of a new business, all factors relevant to the likelihood of the success or lack of success of the business or transaction that are reasonably provable are to be considered, including general business conditions and the degree of success of similar enterprises. Kids’ Universe v. In2Labs, 95 CA4th 870 (2002). The underlying requirement for each of these types of evidence is a substantial similarity between the facts forming the basis of the profit projections and the business opportunity that was destroyed.

In rendering an opinion on lost profits of a new enterprise, “[a] plaintiff’s prior experience in the same business has been held to be probative; as has a plaintiff’s experience in the same enterprise subsequent to the interference…. [T]he experience of the plaintiff and that of third parties in a similar business have been admitted to prove lost profits. In addition, the average experience of participants in the same line of business as the injured party has been approved as a method of proving lost profits. Similarly, pre-litigation projections, particularly when prepared by the defendant, have also been approved. The underlying requirement for each of these types of evidence is a substantial similarity between the facts forming the basis of the profit projections and the business opportunity that was destroyed.” Kids’ Universe, quoting Beverly Hills Concepts v. Schatz & Schatz, 717 A2d 724 (Conn 1998).

California courts have allowed lost profit evidence when there is some basis between historical income and expenses or a comparison to comparable businesses. For example, in Shade Foods Inc. v. Innovative Prods. Inc., an expert was properly allowed to calculate lost profits by using plaintiff’s historical income and expenses at a 10 percent growth rate. In Heiner v. Kmart Corp., 84 CA4th 335 (2000), the expert was allowed to testify about lost profits from a dental practice based on the practice’s financial history and assumed certain growth rate. In Sanchez-Corea v. Bank of America, 38 C3d 892 (1985), while the plaintiff’s small company was compared to the earnings of much larger ones, lost profits were allowed because the damage award was based on plaintiff’s historical growth and prelitigation profit projections.

California courts have uniformly rejected attempts to award lost profits by comparisons to dissimilar business. “A plaintiff can rely on data from other enterprises only if [he or] she shows they operate under similar conditions, such as in the same area and with the same equipment.” Berge v. International Harvester Co. In Berge, “the 16 [percent] profit margin achieved as a national average had no relation whatsoever to Berge’s operation. For this reason, the net profit figure calculated was entirely speculative.” In Parlour Enters. Inc. v. Kirin Group, 152 CA4th 281 (2007), the plaintiff’s expert compared the plaintiff’s small ice cream parlor to several other ice cream parlors, including a publically traded chain business with about 300 restaurants, because they had a “similar concept.” The appellate court held that this was not sufficient evidence of comparability. See also Gerwin v. Southeastern Cal. Ass’n of Seventh Day Adventists, 14 CA3d 209 (1971) (“operating history” not similar); Resort Video Ltd. v. Laser Video Inc., 35 CA4th 1679 (1995) (plaintiff did not introduce any evidence of “operating histories of comparable businesses”).

Failure to consider the effects of competition has been grounds by itself to exclude expert opinions on lost profits. Children’s Broadcasting Corp. v. Walt Disney Co., 245 F3d 1008 (8th Cir 2001), for example, upheld the grant of a new trial when the expert failed to consider potential competition. Heary Bros. Lightning Protection Co. v. Lightning Protection Inst., 287 F Supp 2d 1038 (D Ariz 2003), excluded expert testimony because it was based on the assumption that there were no potential competitors.

Additionally, some courts have excluded expert opinions regarding lost profits when the expert relied solely on data from the plaintiff. In ID Sec. Sys. Canada Inc. v. Checkpoint Sys. Inc., 249 F Supp 2d 622 (ED Penn 2003), the trial court excluded the expert’s testimony when the expert relied on sales projections made by his client’s president, because the information needed to be viewed as reliable by some independent witness. In accord, in Chemipal Ltd. v. Slim-Fast Nutritional Foods Int’l Inc., 350 F Supp 2d 582 (D Del 2004), the plaintiff’s expert improperly did not verify and accepted without question, marketing information provided by plaintiff’s agent. As stated by United Phosphorous Ltd. v. Midland Fumigant Inc., 173 F.R.D. 675 (D. Kan. 1997), “It is not acceptable methodology for an economist to rely on deposition testimony of an interested party where objective evidence existed.”

This analysis applies to traditional tort and breach of contract cases, and care should be taken before any court in these types of cases that rely on antitrust opinions. In antitrust cases, it is proper to base evidence of lost profits on projections of market share, as distinguished from historical profits of the plaintiff’s or similar businesses. Antitrust statutes embody a different set of policy determinations than one would expect in an ordinary breach of contract case. See LePage’s Inc. v. 3M, 324 F3d 141 (3d Cir 2003).

Antitrust plaintiffs can measure damages in this manner because those cases involve anti-competitive actions by a competitor defendant that have taken a share of the market away from plaintiffs. In this context, comparison of market share of the defendant is required in order to determine plaintiff’s lost profits because, were it not for that competitor’s illegal actions, the plaintiff would have retained that market share. See Inter Med. Supplies Ltd. v. EBI Med. Sys. Inc., 181 F3d 446 (3d Cir 1999).

Who may be an expert to establish lost profits? While an expert may be competent to render opinions on some topics, he may not be competent to do so in related areas.

As one appellate court noted, “the Supreme Court of Connecticut reversed a lost profits damage award in favor of an unestablished business where a certified public accountant based his projections on speculative assumptions and unreasonable comparisons…. [T]he certified public accountant who testified on the plaintiff’s behalf had no experience in the industry in question, and based his projections on informal interviews and articles in the lay press about the industry.” Kids’ Universe, citing Beverly Hills Concepts. See also Maatuk v. Guttman, 173 CA4th 1191 (2009) (a CPA did not have expertise in the relevant market).

When projected revenues and expenses are already in evidence and the expert merely needs to calculate profits so as to come up with a number that is comprehensible to the jury, an accountant with no experience in the industry in question would be perfectly capable of rendering an opinion as to the amount of profits the plaintiff has lost.

When, however, the expert is going to project the sales and market share growth that the plaintiff would have achieved absent the defendant’s conduct, the expert will need specialized knowledge, and a generalist just will not qualify. “[I]t must be recognized that a witness’ justifiable patina, which may be conferred by his or her status as an expert in some acknowledged field of expertise, poses a special danger that the trier of fact may extend a comparable credence to the witness’ opinions that fall outside of that area of expertise.” Kay v. First Continental Trading Inc., 976 F Supp 772 (ND Ill 1997).

If a plaintiff can make a colorable showing that any projection of lost profits is based upon historical performance of the company or a comparison to the profits of companies similar in terms of size, locality, sales, products, number of employees, and other relevant factors, the question goes to the jury.

Most of the trial courts in the cases cited herein, however, heeded Judge Friendly’s warning and excluded the opinions at pretrial hearings. See also Westrec Marina Mgmt. Inc. v. Jardine Ins. Brokers Orange County Inc., 85 CA4th 1042 (2000). As Maatuk stated, “A trial court enjoys broad discretion in ruling on foundational matters on which expert testimony is to be based.”

 

 

Premises Liability and Criminal Conduct

It’s a dark, quiet night. As Mary Jones walks from the parking lot to her apartment, a rapist lurks in the shadows and attacks her. She is brutally assaulted. She survives the attack but her injuries are severe.

The person who assaulted Mary is arrested and convicted but is judgment-proof. Mary files suit against her landlord, who is not only well heeled but is also well insured. What are Mary’s chances of winning damages?

Case law provides that in appropriate circumstances a plaintiff may recover damages for harm caused by the criminal act of a third party on the defendant’s premises. However, there are two particularly formidable hurdles in such actions: duty and causation. The duty issue involves an inquiry into whether the defendant property owner is required to take preventive measures to avoid or minimize third-party criminal acts. A property owner’s duty depends in large part on foreseeability.

The second hurdle is causation: Was the defendant’s failure to take the specified preventive measures a substantial factor in causing the plaintiff’s injuries?

Is There a Duty?

As a general rule, there is no duty to protect others from the conduct of third parties. Nevertheless, the courts have carved out an exception to this general principle when the “defendant stands in some special relationship to either the person whose conduct needs to be controlled or in a relationship to the foreseeable victim of that conduct.” (Delgado v. Trax Bar & Grill, 36 Cal. App. 4th 224, 235 (2005).)

Courts have found that such a “special relationship” exists between business proprietors of shopping centers, restaurants, and bars, and their tenants, patrons, or invitees (Ann M. v. Pacific Plaza Shopping Center, 6 Cal. App. 4th 666, 673 (1993)). Accordingly, the “general duty of maintenance” owed to tenants and patrons includes the duty to take reasonable steps to secure common areas against foreseeable criminal acts of third parties that are likely to occur in the absence of such precautionary measures (Ann M., 6 Cal. App. 4th at 674).

Whether a duty exists in a particular case is a question of law for a court to decide, and as such is particularly amenable to resolution by summary judgment (Delgado, 36 Cal. App. 4th at 237–238).

In determining the existence and scope of a duty to protect, a court considers several factors, including: (1) the foreseeability of harm to the plaintiff, (2) the degree of certainty that the plaintiff suffered injury, (3) the closeness of the connection between the defendant’s conduct and the injury suffered, (4) the moral blame attached to the defendant’s conduct, (5) the policy of preventing future harm, (6) the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and (7) the availability, cost, and prevalence of insurance for the risk involved (Castaneda v. Olsher, 41 Cal. App. 4th 1205, 1213 (2007)).

Although there are many factors, foreseeability and the extent of the burden to the defendant are ordinarily the crucial considerations (Sharon P. v. Arman, Ltd., 21 Cal. App. 4th 1181, 1189–1190, & n. 2 (1999)).

Typically, courts resolve the existence and scope of a defendant’s duty by balancing the foreseeability of the harm against the burden of the duty imposed. When the burden of preventing future harm is great, a high degree of foreseeability may be required. On the other hand, if there are strong policy reasons for preventing the harm, or the harm can be prevented by simple means, a lesser degree of foreseeability may be required (Ann M., 6 Cal. App. 4th at 678–679). The state Supreme Court has described this process as a “sliding-scale balancing formula” (Delgado, 36 Cal. App. 4th at 243).

The court must identify the specific action or actions the plaintiff claims the defendant should have taken. “Only after the scope of the duty under consideration is defined may a court meaningfully undertake the balancing analysis of the risks and burdens present in a given case to determine whether the specific obligations should or should not be imposed on the landlord.” (Castaneda, 41 Cal. App. 4th at 1214.) Duty is determined by a balancing of “foreseeability” of the criminal acts against the “burdensomeness, vagueness, and efficacy” of the proposed security measures (Ann M., 6 Cal. App. 4th at 678–679).

The full analytical process entails several steps. First, the court considers the plaintiff’s contention as to the safety measures that the defendant should have taken to prevent the harm. This part of the analysis frames the issue by defining the scope of the duty under consideration. In short, the question is, how much should the defendant have done to prevent the plaintiff’s injury?

Second, the court must analyze how financially and socially burdensome the proposed measures would be to a landlord. These could range from minimally burdensome to significantly burdensome under the facts of a given case.

Third, the court identifies the nature of the third-party conduct that the plaintiff claims could have been prevented had the landlord taken the proposed measures, and then it assesses how foreseeable (on a continuum from a mere possibility to a reasonable probability) it was that this conduct would occur. Once the burden and foreseeability have been independently assessed, they can be compared in determining the scope of the duty the court imposes on a given defendant. The more certain the likelihood of harm, the higher the burden a court will impose on a defendant to prevent it; the less foreseeable the harm, the lower the burden a court will place on a defendant. Although other factors may come into play in a particular case, “the balance of burdens and foreseeability is generally primary to the analysis.” (Castaneda, 41 Cal. App. 4th at 1214.)

Significantly, when the burden of preventing future harm caused by third-party criminal conduct is great or onerous, the court will require more foreseeability before imposing it. Thus, if the plaintiff contends that the defendant had a legal duty to provide guards, bright lighting, stronger fences, security cameras, and to conduct periodic walk-throughs by trained personnel, the court will demand “heightened” foreseeability, demonstrated by prior similar criminal incidents or other indications of a reasonably foreseeable risk of violent criminal assaults in the location under scrutiny (Delgado, 36 Cal. App. 4th at 243 & n. 24). Note, however, that the test in this regard is prior similar criminal incidents, not prior identical criminal incidents. (See Claxton v. Atlantic Richfield Co., 108 Cal. App. 4th 327, 339 (2003).)

On the other hand, in cases where the harm can be prevented by simple means or by imposing merely minimal burdens (such as when a plaintiff asserts the defendant had a duty to maintain and/or repair already existing doors and locks), only “regular” reasonable foreseeability triggers liability (Ambriz v. Kelegian, 146 Cal. App. 4th 1519, 1534 (2007)).

A recent case illustrates the practical application of these principles (Tan v. Arnel Management Co., 170 Cal. App. 4th 1087 (2009)). Yu Fang Tan arrived at his multi-building apartment complex around 11:30 p.m. Unable to locate an available parking space within the gated area of the complex, Tan parked in the leasing office parking lot outside the gates. As he was parking his vehicle, an unidentified man approached him and asked for help. When Tan opened his window, the man pointed a gun at him and ordered him to get out of the car because the man wanted it. Tan responded, “OK. Let me park my car first.” When the car moved, the assailant shot Tan in the neck, rendering him a quadriplegic.

Tan, along with his wife and son, brought suit against both the company that managed the apartment complex and the property owners. Before trial, the court ruled that three prior violent crimes against others on the property were not sufficiently similar crimes to the one perpetrated on Tan to make his assault foreseeable. The trial court therefore refused to impose a duty of care on the defendants. Tan appealed the decision.

The court of appeal reversed, in part because the justices concluded that the specific security measures proposed by Tan were minimal. Tan had suggested that in light of the previous assaults, the defendants should have (1) moved the existing security gates from the back of the access road, or (2) installed similar gates at the visitor and leasing office parking lots. The court of appeal also found the cost of the proposed security measures was not at all onerous (Tan, 170 Cal. App. 4th at 1099).

In addition, the court of appeal concluded that the evidence of three vicious criminal assaults in the common area of the property within two years of the attack on the plaintiff—although not involving a gun—nevertheless amounted to substantial evidence of a reasonably foreseeable risk of violent criminal assaults. In short, the evidence of prior incidents supported imposition of a duty to protect on the defendants’ part. The court of appeal reasoned that the trial court had set the bar too high to establish foreseeability, essentially requiring nearly identical prior criminal incidents. A more relaxed standard was appropriate, the court concluded, because the proposed security measures were not onerous (Tan, 170 Cal. App. 4th at 1101).

The Causation Hurdle

Causation is ordinarily a question of fact that cannot be resolved by summary judgment. The issue becomes a question of law only if, under undisputed facts, there is no room for a reasonable difference of opinion (Ambriz, 146 Cal. App. 4th at 1531–1532).

To prove causation, a plaintiff must show that the defendant’s act or omission was a “substantial factor” in bringing about the claimed injury. To meet this burden, a plaintiff cannot simply criticize the defendant’s security measures.

Instead, as a series of appellate court decisions have established, the plaintiff must show the injury was actually caused by the failure to provide appropriate measures. (See Noble v. Los Angeles Dodgers, Inc., 168 Cal. App. 3d 912 (1985) [plaintiffs assaulted in the Dodger Stadium parking lot showed only “abstract negligence” without proof of a causal connection between the defendant owner’s breach and the plaintiffs’ injury]; Constance B. v. State of California, 178 Cal. App. 3d 200 (1986) [plaintiff failed to submit evidence showing that additional lighting would have prevented the attack]; Nola M. v. University of Southern California, 16 Cal. App. 4th 421 (1993) [plaintiff attacked and raped on a college campus failed to prove additional security measures would have prevented the attack]; Leslie G. v. Perry & Associates, 43 Cal. App. 4th 472 (1996) [plaintiff raped in parking garage of apartment complex; no evidence that the assailant had entered through the broken gate, or that the gate was the only means of entry into the garage of the apartment building].)

The Supreme Court embraced the reasoning of these decisions in Saelzler v. Advanced Group 400 (25 Cal. App. 4th 763 (2001)). In that case, the plaintiff was assaulted while attempting to deliver a package at an apartment complex. She alleged that better security measures would have prevented the assault. The court explained that because the assailants were unidentified, the plaintiff could not demonstrate that their entry on the premises was unauthorized or that the failure to provide gate security or functioning locked gates was a substantial factor in causing her injuries. The court also rejected as entirely speculative the plaintiff’s claim that her injuries could have been avoided had the defendants hired roving security guards to patrol the entire premises during the day (Saelzler, 25 Cal. App. 4th at 776–777).

These cases notwithstanding, a plaintiff may use circumstantial evidence to show an assailant took advantage of a defendant’s security lapse in the course of committing an attack, and that the lapse was a substantial factor in causing the injury. But in doing so, the plaintiff must show that the inferences favorable to him or her are more reasonable or probable than those against (Leslie G., 43 Cal. App. 4th at 483.)

Instructive is the Ambriz case, cited above. In that case, the plaintiff was assaulted and raped by an intruder at her apartment complex. Directly addressing the causation issue, albeit in the context of the “case-within-a-case” analysis of an attorney-malpractice action, the court of appeal found that the inferences from the circumstantial evidence on causation created a triable issue of fact precluding summary judgment.

For example, there was evidence that a number of entry doors to the buildings were not closing properly and were not locking. Despite numerous complaints, the doors were not repaired prior to the plaintiff’s rape. There also was evidence of numerous instances in which the rapist and other male “intruders” gained access to the inside of the building prior to the rape. In addition, a police detective testified that police found no evidence of forced entry into the building at the time of the rape.

The defendants countered by suggesting the assailant might have entered the building in any number of ways. A tenant could have let the assailant in; or entry could have been through a door that had been propped open by another resident; a sliding-glass door on a ground-floor patio or an unlocked window could have been an entry point as well, as could a second-floor balcony door or window. But the court found that “considering the lack of evidence supporting any of these other methods of entry, it is more likely that the assailant entered through a door that failed to lock than by any of these alternative methods.” (Ambriz, 146 Cal. App. 4th at 1537.)

Additionally, the identity of the attacker was known; he was a transient who did not live at the complex and whom the plaintiff had seen inside her building on more than ten occasions prior to the attack. The court thus inferred his entry was unauthorized.

The Ambriz court concluded by noting the Saelzler opinion itself recognized that circumstantial evidence is useful for inferring how an attacker likely gained access: “Eyewitnesses, security cameras, even fingerprints or recent signs of break-ins or unauthorized entry may show what likely transpired at the scene.” (Ambriz, 146 Cal. App. 4th at 1538 [quoting Saelzler].)

Safety First

Duty and causation issues are often formidable hurdles for a plaintiff seeking to recover damages for harm caused by the criminal act of a third party on a defendant’s premises. The duty question in particular invites a defense motion for summary judgment, and in appropriate cases a causation issue can be summarily adjudicated as well. Consequently, counsel for plaintiffs and defendants alike should focus on developing evidence pertinent to these issues from the very outset of litigation. And for property owners, there is another lesson: Don’t wait for a summons and a complaint. If security problems become evident, take reasonable steps to deal with them before someone gets hurt, not after.

 

Business Judgment Rules

Corporations Code. The Corporations Code provides that even though officers and directors are fiduciaries if they make poor or incorrect decisions that result in damage or loss, they may still avoid personal liability if they performed their duties:
In good faith,
• In a manner which the director believes to be in the best interests of the corporation, and
• With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (Corp. Code §7231(c).)
• Given that the directors cannot ensure corporate success, the business judgment rule specifies that the court will not review the business decisions of directors who performed their duties with strict adherence to the aforementioned requirements.
• As part of their duty of care, directors have a duty not to waste corporate (Association) assets by overpaying for services or by undertaking unnecessary projects. The business judgment rule is very difficult to overcome, and courts will not interfere with directors unless it is clear that they are guilty of fraud, intentional misconduct, gross negligence, or misappropriation of corporate funds.

Davis-Stirling Act. As provided for in Civil Code §5800, a volunteer officer or director is not personally liable in excess of the association’s insurance for bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortuous act or omission of the officer or director if all of the following criteria are met:
The act or omission was performed within the scope of the officer’s or director’s association duties.
• The act or omission was performed in good faith.
• The act or omission was not willful, wanton, or grossly negligent.
• The Association is exclusively residential.
• The director has no developer or lender affiliation.
• The director is either a tenant or owner of not more than two units or lots.
• The director serves without compensation.
• The association maintained and had in effect at the time the act or omission occurred and at the time a claim is made one or more policies of insurance which shall include coverage for (A) general liability of the association and (B) individual liability of officers and directors of the association for negligent acts or omissions in that capacity; provided, that both types of coverage are in the following minimum amount:
• At least $500,000 if the association consists of 100 or fewer separate interests;
At least $1,000,000 if the association consists of more than 100 separate interests.

Judicial Deference

• Using the Business Judgment Rule, courts will defer to board decisions even if a reasonable person would have acted differently, provided the board acted:
• In good faith,
• In the best interests of the association, and
• Upon reasonable investigation.

Limitations on Judicial Deference

It is a rule of deference to the reasoned decision-making of homeowner’s association boards concerning ordinary maintenance. It does not create a blanket immunity for all the decisions and actions of a homeowner’s association. The Supreme Court’s precise articulation of the rule makes clear that the rule of deference applies only when a homeowner sues an association over a maintenance decision that meets the enumerated criteria. Judicial deference rule will not insulate boards’ decisions from judicial review.
• Judicial deference rule does not apply where board decision is inconsistent with CC&Rs and is thus beyond board’s authority.
• The rule of judicial deference set forth in court cases provide protection from personal liability for the individual directors of a non-profit homeowner’s association. It does not follow and is not true that the same rule of judicial deference will also automatically provide cover to the entity itself. There is a difference between the standard of care, which is a reflection of the duty expected of decision makers, and the judicial deference rule, which is a modified standard of review for determining whether the actual decision-makers will be held liable for their poor decisions.

Limitation Summary

Judicial deference is limited by the following:
Where a board makes decisions contrary to the governing documents;
• Where the board fails to enforce the governing documents;
• Where responsibility for repairs is unclear;
• Where a board fails to investigate and repair.
• To challenge the actions of a corporation’s (Association) board of directors, a plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty, or due care.
• Failing to do so, a plaintiff is not entitled to any remedy unless the transaction constitutes waste; that is, the exchange was so one-sided that no business person of ordinary sound judgment could conclude that the corporation has received adequate consideration.
• In effect, the business judgment rule creates a strong presumption in favor of the Board of Directors of a corporation (Association), freeing its members from possible liability for decisions that result in harm to the corporation.
• The presumption is that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation’s best interest. In short, it exists so that a Board will not suffer legal action simply from making a bad decision.
• A court will not substitute its own notions of what is or is not sound business judgment if the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.

Standard of review

The following test was constructed in as a guideline for the satisfaction of the business judgment rule. Directors in an Association should:
Act in good faith;
• Act in the best interests of the corporation;
• Act on an informed basis;
• Not be wasteful;
• Not involve self-interest (duty of loyalty concept plays a role here).

Duty of care and duty of loyalty

Although a distinct from the duty of care, the duty of loyalty is often evaluated by courts in certain cases dealing with violations by the board, which involve self-interest violations (as opposed to gross incompetence with the duty of care). Violations of the duty of care are reviewed under a gross negligence standard, as opposed to simple negligence.
• Prohibition against self-interest transactions.
• Self or conflicting interest transactions occur when a director, who has a conflicting interest with respect to a transaction, knows that he or a related person is (1) a party to the transaction; (2) has a beneficial financial interest in, or closely linked to, the transaction that the interest would reasonably be expected to influence the director’s judgment if she were to vote on the transaction; or (3) is a director, general partner, agent, or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board.

Rationale

The business judgment rule is the offspring of the fundamental principle that the business and affairs of a corporation (Association) are managed by or under its board of directors. In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the Association and its owners. The rationale for the rule is the recognition by courts that board of directors need to be free to make decisions without a constant fear of lawsuits affecting their judgment.
• The presumption raised by the Business Judgment Rule may be rebutted by the plaintiff. The business judgment rule is a presumption that in making a business decision, the directors of a corporation or an unincorporated Association acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one. Further, rebuttal typically requires a showing that the defendants violated the duty of care or loyalty (with courts assuming director’s good faith otherwise).

Robert’s Rules of Order

When there is no law,
but every man does what is right in his own eyes,
there is the least of real liberty.

–Henry M. Robert

In 1863, a man named Henry Robert, an engineering Captain in the United States Army, was asked to preside over a large church gathering.   Captain Robert did not know how to preside over meetings, but trusting that the congregation would behave itself, he plunged right in.  Moreover, with that plunge came the quick determination that he would NEVER preside over another meeting until he knew more about parliamentary procedure.   Hence, the creation of Robert’s Rules of Order.

Parliamentary Procedure

Before delving into specifics of Robert’s Rules or discussing their applicability to associations, it is important first to understand what the term “parliamentary procedure” means.  This term essentially means rules of order that facilitate full participation of the membership and allow groups to maintain democratic rule, flexibility, and protect rights of both the minority and majority.

There are several key principles when it comes to parliamentary procedures, which include the following:

  • Interests of the organization come before individual interests
  • All members are equal
  • Quorum must be present
  • One thing at a time
  • Full debate allowed
  • Focus on the issue, not the person
  • Majority Rules

Robert’s Rules

Expounding on the above principles, Captain Robert published Robert’s Rules of Order in 1876, containing roughly 700 pages of formalized parliamentary procedures modeled after the U.S. House of Representatives procedures in use at that time.

The processes set forth in Robert’s Rules are intended to be used in large assemblies and are far too formal to be utilized in small meetings.  In fact, strict use of Robert’s Rules in small meetings (such as board and membership meetings) may actually hinder the conduct of business.  Robert’s Rules recognizes this and specifically provides that in board meetings some of the formality necessary in a large assembly may be relaxed.

If you are looking for examples of the types of processes in Robert’s Rules that may be counter-productive to the conduct of meetings in an association setting, read below:

  • Point of order allowed any time attendee wish to challenge how meeting is being run;
  • Attendees may “appeal” decisions of the chair and move decisions from the chair to the attendees;
  • Objection to consideration of the question is allowed to “enable the assembly to avoid a particular original main motion”.

The above are only a small sampling of the types of processes you will find in the 700-page book entitled Robert’s Rules of Order.

It is important to realize that Robert’s Rules are not based on statutes, nor are they based on any laws or court decisions.  In fact, Robert’s Rules are not legally required to be used by any entity and are not legally binding unless formally adopted by an entity.

Use of Robert’s Rules in Associations

In the case of HOAs, associations are not legally obligated to follow or adopt Robert’s Rules unless so required by their governing documents (which is extremely rare).  So, if associations are not bound by or required to follow Robert’s Rules, what should they do?

As required by the Colorado Common Interest Ownership Act, associations are required to adopt a conduct of meetings policy.  This is the document to be utilized by associations to set forth and formalize their individual procedures and processes for meetings.  Such policy should set forth rules of conduct that are more relaxed and less formal than what is contained in Robert’s Rules, but still address situations that may come up in the context of an HOA meeting.

For example, it is appropriate to have a rule in your policy dictating that only one person speaks at a time and only when recognized by the chair.  It is also appropriate to require attendees to be civil to one another and refrain from using profanity or personal insults.  These are all examples of Robert’s Rules that have been extremely relaxed for the use in an HOA meeting.

Although Robert’s Rules are a great tool for large assemblies, they present more of a hindrance in smaller venues such association meetings.  For this reason, associations should create their own rules of conduct that may follow general concepts set forth in Robert’s Rules, but in an extremely simplified manner.

 

Spotting Problematic Contracts

Associations enter into contracts on a regular basis for various items ranging from general landscaping to major projects such as roofing and fence replacement.  Most of the time, these contracts are written on behalf of the contractors and are standard preprinted forms.  These types of contracts leave little room for negotiation, are often missing key terms and provisions, provide little protection for the association, and contain provisions that may become problematic for associations.

Although it is always recommended that contracts in excess of $5,000 be reviewed by legal counsel, should an association take on contract negotiation on its own, it should consider the following tips:

  • Verify the contract contains correct names of all parties.  For example, the contract should specify the full legal name of the association (as stated in its articles of incorporation) and not the management company as the association is the entity entering into the contract.
    •    Do not sign a work order, proposal, offer, or quote without reviewing and understanding all terms therein.  Once you sign it, it becomes binding even if the word “contract” or “agreement” is not utilized.
    •    Do not rely on verbal representations or explanations pertaining to the contract.  All terms relating to the contract must be included within the “four corners of the document” meaning that they need to be in writing within the contract itself.  Verbal representations will not be legally enforceable.
    •    Verify the contract, at a minimum, contains the following provisions:
  1. Start and completion dates.
  2. Scope and standards of work to be provided.
  3. Contract price and schedule for payment.
  4. Indemnification for negligence, willful, and wanton acts and damages by the contractor or its employees or subcontractors.
  5. Termination provisions.
  6. Attorney’s fees awarded to the prevailing party in the event of legal action.
  7. General liability, casualty and workers compensation insurance provided by the contractor.
  8. Venue in the event of a lawsuit—e., the county in which legal action must be commenced.
  9. Responsibility for obtaining the necessary permits and licenses, if any.
  10. Lien releases and waivers.
  11. Payment is not a release.
  12. How, when, and where notice must be provided.
  13. Contract is the complete and entire agreement between the parties.
  • If the association only wants the contractor hired to perform the work in question, verify that assignment of the contract requires the prior written agreement of the association.

The above tips do not encompass all aspects of contracts that may be presented to associations, but they are some of the more important and problematic provisions.

 

How To Get Out of a Contract

First and foremost, it is important to understand an association cannot get out of a contract just because the board changes its mind or finds a better deal.  By the same token, an association cannot get out of a contract because they do not get along with contractors or their employees.

When it comes to terminating or getting out of, a contract, an association’s rights, and abilities are set forth in the contract itself.  For this reason, it is imperative that boards read through and understand all association contracts and have them reviewed by legal counsel prior to signing.  Generally, if a remedy is not spelled out in the contract itself, it does not exist.

If your community is contemplating terminating a contract, we recommend you first take the following steps:

  1. Review the contract for validity.  The first way to get out of your contract would be if you do not have an enforceable contract to start with.  Make sure the contract was signed by both parties, and both parties are obligated to do something under the agreement.  For example, the contractor is obligated to perform specific work described in the contract, and the association is obligated to pay contractor for the work.
  2. Review contract for termination rights.  Many contracts in the community association industry contain provisions setting forth termination right of both parties and specifically allow for termination after notice is provided.  However, you must provide termination notice exactly as required in the contract or it will not be valid.  This means notice is sent out the correct number of days prior to termination; notice is sent to the correct address, and via appropriate delivery system (e.g., U.S. mail, or email, or certified mail) or as otherwise may be specified in the contract.
  3. Determine if there is an “anticipatory breach” by the other party. If the other party has given an indication it is not going to uphold its end of the deal under the contract, this may present justification for termination, especially if you stand to incur damages if the other party does not perform.
  4. Investigate whether fraud exists.  If the other party provided you with false information prior to execution of the contract and the association relied on this information when signing the contract, the association might be able to terminate the contract on that basis.
  5. Has the contract been breached?  Has the contractor failed to comply with any of the requirements set forth in the contract?  If so, this may be a basis to terminate the contract, but only if the contract itself contains provisions addressing this situation.

Termination of contracts and breach of contract claims are complicated, and the law surrounding contracts is very technical.  These situations are almost always dependent on the facts and circumstances. Therefore, seeking the advice of legal counsel is highly recommended before trying to get out of a contract.