New case on the business judgment rule

Coley v. Eskaton (2020) 51 Cal. App. 5th 943

This is an action by a homeowner against the board of an HOA. The court awarded $2,300 in damages and $654,000 in attorneys fees! The plaintiff argued that the directors breached fiduciary duty and other claims, alleging directors approved actions of HOA for benefit of operators rather than HOA itself and homeowners. The court found directors breached fiduciary duty to HOA but declined to find directors liable in their personal capacities. The court of appeals reversed saying:

1 directors failed to establish HOA transactions were fair and reasonable;

2 directors had personal financial interest in transactions they approved that was distinct from interest of HOA members generally; and

3 directors breached fiduciary duty to HOA members by approving transactions in which they had material financial interest and which were not inherently fair to HOA and its members.

As to the BJR, theopinion says:

B. Application of the Business Judgment Rule

1The defendants’ next claim the court misapplied the business judgment rule. The business judgment rule is a policy of deference to a corporate board’s decisionmaking. (Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249) But the trial court here found the rule inapplicable because the Eskaton entities’ employees who sat on the Association’s board had an “irreconcilable conflict of interest” that “preclude[d] the business judgment rule as a defense to liability in this case.” According to the defendants, rather than finding this conflict precluded the business judgment rule altogether, the court instead should have afforded the defendants an opportunity to reclaim the benefit of the rule by showing they acted in good faith after reasonably investigating material facts. We view the law differently.

1. Background law

California recognizes two types of business judgment rules: one based on statute and another on the common law.  Corporations Code section 7231 supplies the relevant statutory rule for nonprofit mutual benefit corporations like the Association. Under that statute, a director is not liable for “failure to discharge the person’s obligations as a director” if the director acted “in good faith, in a manner such 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, subds. (a)(c).) The common law business judgment rule is similar but broader in scope. It is similar in that it immunizes directors for their corporate decisions that are made in “good faith … to further the purposes of the [corporation], are consistent with the [corporation’s] governing documents, and comply with public policy.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374) And it is broader in that it also “ ‘insulates from court intervention those management decisions’ ” that meet the rule’s requirements. (Lamden, supra, 21 Cal.4th at p. 257.)

45A director, however, cannot obtain the benefit of the business judgment rule when acting under a material conflict of interest. Deference under the business judgment rule is premised on the notion that corporate directors are best able to judge whether a particular transaction will further the company’s best interests. (Gaillard, supra, 208 Cal.App.3d at p. 1263, 256 Cal.Rptr. 702.) But that premise is undermined when directors approve corporate transactions in which they have a material personal interest unrelated to the business’s own interest. And it is particularly undermined when a majority of these directors approve transactions while having a material conflict of interest. Under those circumstances, the directors carrying this conflict of interest are precluded from seeking the benefit of the business judgment rule. (See Everest Investors, supra, 114 Cal.App.4th at p. 430, 8 Cal.Rptr.3d 31Gaillard, supra, 208 Cal.App.3d at p. 1263, 256 Cal.Rptr. 702.)

678But although the business judgment rule is inapplicable under these circumstances, that is not to say that corporate decisions affected by these types of conflicts are improper as a matter of law. As with the business judgment rule generally, statutory and common law requirements are again relevant in this context. Corporations Code section 7233 supplies the relevant statutory rule. It provides, among other things, that an interested director who casts a deciding vote on a transaction must show the “transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.” (Corp. Code, § 7233, subd. (a)(3).) Section 7233, however, only applies to transactions “between a corporation and one or more of its directors, or between a corporation and any domestic or foreign corporation, firm or association in which one or more of its directors has a material financial interest.” (Corp. Code, § 7233, subd. (a).) The common law rule, as before, is similar but broader in scope. It is similar in that it requires interested directors to “prove that the arrangement was fair and reasonable”—a rigorous standard that requires them “ ‘not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.’ ” (Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 31-32, 216 Cal.Rptr. 130, 702 P.2d 212 (Tenzer).) And it is broader in that, unlike Corporations Code section 7233, it is not concerned only with transactions between a corporation and either its directors or a business in which its directors have a material financial interest. (See Corp. Code, § 7233, subd. (a).) Rather, recognizing the potential for self-dealing may also exist outside this particular context, courts have found directors must also satisfy the common law requirements when they approve other transactions in which they have a material financial interest distinct from the corporation’s own interest.

Study Sessions

I am not going to do a study session this Saturday because of the exam answers that are due next Tuesday. As I said in class last night, I am willing to spend an hour to 90 minutes with students by Zoom one evening a week for the next five weeks – starting next week. I can do it at 5pm or at 7pm, any night obviously except Tuesday night. Please send me an email if you are interested in attending telling me which days and times you prefer. I will pick a time which the most people can attend. That is the best I can do.

What is an employee under California law?

We are going to spend Tuesday discussing agency law.  The issue comes up in two contexts:  1.  Is a principal liable for the contract entered into by his (or its) agent?  Answer, yes if the agent had authority.  2.  Is a principal liable for the torts of his agents?  Answer, yes if the agent is an employee, maybe (although probably not) if the agent is an independent contractor.

So what is an employee?  That could easily be an entire semester.  The question necessarily includes what is an employer?

The California Supreme Court has recently given us 85 pages of explanation (and history of the issue) of how to figure out whether a person is an employee or independent contractor.

In Dynamex Operations West, Inc., v. Superior Court, 4 Cal.5th 903 (2018), the Supreme Court summarized it with a three part test:

1. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
2. Does the worker perform work that is outside the usual course of the hiring entity’s business?
3. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

It concluded that it is the employer’s burden to establish all three.  “The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.”

 

 

Is wife liable for hubby’s debts?

NO!  Students (and even most lawyers) are always surprised when I say that my wife is absolutely not liable for my debts – and certainly not because she is my wife.

Property that she and I own may be liable for my debts (i.e., is probably liable for my debts).

A few California Family Code sections:

910.

(a) *** the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

(b) “During marriage” for purposes of this section does not include the period after the date of separation ***.

911.

Continue reading

Insider trading issues

I received an email from a student re insider trading, specifically re what is a tippee.  Take a look at my post a couple of years ago on the Supreme Court case of Salman v. US.

https://profhayesuwla.com/2016/12/07/supreme-court-clarifies-meaning-of-tippee-in-insider-trading-dispute/

The Supreme Court clarified that “a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information.   A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit.”

The Supreme Court then said that a “close personal relationship” is enough as far a receiving a personal benefit.

Keep in mind that many cases require “scienter” i.e., bad intent, intent to avoid a law.  Keep in mind also that the information must be “material non-public information.”

The student also asked whether the same transaction could also violate general securities laws, i.e., a sale of a security that is not registered and not otherwise exempt.  Answer:  Of course and that must be considered.

Bridging the Gap – Saturday March 30, 2019

This is a great program

Save the Date: Bridging the Gap—Saturday, March 30, 2019

If you are a recent law school student graduate or young attorney, you will not want to miss Bridging the Gap 2019 – From Books to Billable – A Primer for Success on Saturday, March 30, 2019.  This free one-day program is designed to help first- and second-year attorneys make the transition from law school student to legal professional.  Bridging the Gap features prominent “faculty” with specific area expertise sharing their insights for new attorneys.  We encourage you to take advantage of this free program to expand your professional network with LACBA’s Barristers/Young Attorneys and other section leaders.  Event registration will open in early 2019.