Under the business judgment rule, a director will not be liable for a mistake in business judgment provided that certain conditions are met.  In the case of a California nonprofit mutual benefit corporation, a director who performs her duties in accordance with Corporations Code Section 7231(a) and (b) has no liability based on any failure to discharge her obligations as a director.  Cal. Corp. Code § 7231(c).  Subdivision (a) of the statute requires that a director “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”.

In Palm Springs Villas II Homeowners Ass’n, Inc. v. Parth, 2016 Cal. App. LEXIS 485 (June 21, 2016), the Court of Appeal considered whether the business judgment rule is available to a director who violates the corporation’s governing documents.  In an earlier case, Biren v. Equality Emergency Medical Group, Inc., 102 Cal. App. 4th 125 (2002), the Court of Appeal had concluded that a violation of a corporation’s governing documents “did not by itself make the business judgment rule inapplicable”. Id. at 137.  However, the Court of Appeal in Parth said that the “case law is clear that conduct contrary to governing documents may fall outside the business judgment rule”.  The Court distinguished Biren on the basis that in that case the director had met the other conditions to the business judgment rule whereas in Parth there were issues of fact as to whether those other conditions were met.