Epsten, APC

California Corporations Code §7210 provides that a corporation shall have a board of directors who shall manage and exercise all corporate powers on behalf of the corporate entity. Additionally, Corporations Code §7140 provides that, subject to any limitations contained in its articles or bylaws, a corporation shall have the power to:

“(i) Assume obligations, enter into contracts, including contracts of guarantee or suretyship, incur liabilities, borrow or lend money or otherwise use its credit, and secure any of its obligations, contracts or liabilities by mortgage, pledge or other encumbrance of all or any part of its property and income.” [Emphasis added.]

However, many association governing documents impose limitations upon a board of director’s ability to borrow money or incur indebtedness without the approval of the membership. Accordingly, an association should review its governing documents prior to executing any loan documents.

Reserves are intended to fund the maintenance, repair, restoration and replacement of the major components an association is responsible for under its governing documents. Civil Code section 5515 authorizes an association to borrow money from a reserve account for up to one year to cover a short-term cash-flow deficit provided certain requirements are met.

One of the most fundamental duties of an association is the preparation and creation of a budget for the association. The pro forma operating budget must be distributed annually, pursuant to Civil Code section 5300, not less than 30 days nor more than 90 days prior to the beginning of the association’s fiscal year.

Questions about building boundaries typically arise most often in a condominium context where boundary lines between common area and units, between units and exclusive use areas and between exclusive use areas are relevant to maintenance. In non-condominiums, building boundaries may be relevant to encroachment onto an adjoining owner’s property, onto an easement or onto a setback required by the governing documents or local law. Making such determinations requires an examination of a condominium plan, tract map or parcel map. It may also require some type of inspection in the field using a licensed land surveyor or engineer.

The business judgment rule mandates a director to perform his/her duties 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 similar position would in similar circumstances. (Corp. Code § 7231(a)) In following this rule, a director will avoid personal liability for poor decisions. See also Civil Code section 5800.

“Bylaws” refers to the document regulating the administration of the association (such as voting rights, notice and convening of board and member meetings, number of directors, offices, proxies, appointment of committees, etc.) Both incorporated and unincorporated associations have bylaws. Many older sets of bylaws contain provisions appropriate under the Corporations Code, however, changes to the Davis-Stirling Act have frequently overridden different provisions in the Corporations Code (particularly in the area of elections), so care must be exercised in determining whether a particular bylaw provision continues to be valid.