The question of whether an Association may choose not to prepare a reserve
study during the pendency of its construction defect litigation in light
of such requirements of California Civil Code § 1365.5(e) requiring
that a reserve study be performed at least once every three years may best
be addressed by looking to Corporation Code §7231, which states in
pertinent part:
"(a) A director shall perform the duties of a director, including
duties as a member of any committee of the board upon which the director
may serve, 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.
(b) In performing the duties of a director, a director shall be entitled
to rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented
by: (2) Counsel, independent accountants or other persons as to matters
which the director believes to be within such person's professional or
expert competence; so long as, in any such case, the director acts in good
faith, after reasonable inquiry when the need therefor is indicated by
the circumstances and without knowledge that would cause such reliance
to be unwarranted."
The existence of a current reserve study poses problems for the Association's
counsel during construction defect litigation, because many times the defendants
will utilize the study to impeach the Association's defect experts with
regard to the cost of repair. It would be in the best interests of the Association
to postpone up-dating the reserve study until the litigation is concluded,
which would probably be for a period of only twenty-four months.
In addition, a regular reserve study would be meaningless in light of the
extensive investigation undertaken in preparation for the litigation and
would be an unnecessary expense of the Association.
It has been suggested that a reserve study be prepared at the same time
as the filing of the construction defects lawsuit reflecting the opinions
of the Association's experts, but this would put privileged information
directly into the hands of the defendants right from the beginning, which
could be very disadvantageous to the Association in their defect litigation.
The majority of the law firms offering their input with regard to this issue
chose the overcautious route of suggesting that a reserve study be performed
and include a caveat regarding the pending construction defect litigation.
They warn that the board should be aware that failure to complete the reserve
study may constitute a breach of the board's fiduciary duties. We disagree.
The board is charged with acting in the best interests of the Association
and its pending members, and in the instances discussed above, performing
a reserve study during pending construction defect litigation would most
likely prove not to be in the best interest of the Association and its members.
Should the Association desire to increase its regular assessments for any
fiscal year more than 20 percent greater than the assessment of the preceding
fiscal year Civil Code § 1366(a) requires that a summary of the association's
reserves be included in the pro forma operating budget. (Civil Code §
1365(a)(2)).
Due to recent legislation, California Civil Code § 1365.5 now requires
the Association board of directors, at least once every three years, to
cause to be conducted a reasonably competent and diligent visual inspection
of the accessible areas of the major components which the Association is
obligated to repair, replace, restore, or maintain. The extensive site inspections
and invasive testing done in connection with the construction defect litigation
should undoubtedly satisfy this requirement as long as it includes a diligent
visual inspection of all of the accessible major components.
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