1. HCCA – A LMOST F REE L EGAL A DVICE N OVEMBER 14, 2013 WHY BOARDS GET SUED Presented by Milton M. Motooka Motooka & Yamamoto

2. INTRODUCTION

3. CLAIMS ON DIRECTORS’ & OFFICERS’ INSURANCE The most frequent claims filed under Directors’ and Officers’ Liability Insurance are as follows: Discrimination Breach of governing documents Wrongful termination Breach of contract Failure to properly reserve funds Libel, slander, & defamation of character Conflict of interest Failure to collect assessments Improper payments Breach of loyalty

4. I.THE FUNCTION OF THE BOARD

5. II. DUTIES OF DIRECTORS AS BOARD MEMBERS A. Familiarity with project’s legal documents 1. Declaration 2. By-laws 3. House rules

6. B. Fiduciary duty of directors (section 514b-106, Hawaii revised statutes) 1. Duty of obedience 2. Duty of diligence or due care Major renovation project: a. assemble the project team b. investigate the contractors before selecting them c. Hire the appropriate experts d. Penny wise pound foolish – cheaper is not always better e. Make sure contractors are bidding apples to apples f. Warranties are crucial g. Communication is crucial to the success of the project h. Consider increasing d & o insurance coverage prior to commencing the project

7. 3. Duty of loyalty- avoid conflicts of interest 4. Duty of good faith

8. C. Rule making and the enforcement of rules 1. Reason for rules 2. Tips for rule making 3. Avoid selective enforcement

9. D. Delegation of authority not responsibility E. Business judgment rule 1. What is the business judgment rule? 2. What is the effect of the business judgment rule?

10. F. Financial management 1. Collection of maintenance fees and special assessments 2. Maintaining financial records 3. Fidelity bond requirements (section 514- b-143(3), Hawaii revised statutes) 4. Annual audits (section 514b-150, Hawaii revised statutes) 5. Tax returns

11. G. Budgeting and assessments H. Reserves (section 514b-148, Hawaii revised statutes) I. Investment of association funds (section 514b-149, Hawaii revised statutes)

12. III. DEALING WITH DIFFICULT OWNERS TO AVOID LAW SUITS A. Communicate with owner/tenant and determine what the issues are B. Mediate the dispute if necessary C. Arbitrate the dispute if mediation fails

13. Thank you! Motooka & Yamamoto, LLLC MYHawaiiLaw.com Client Services: 532-7240 Help Line (Collections): 532-7246