As an HOA board member, your actions can have a significant impact on the community’s wellbeing. And so, you want to be sure that you are serving your role and association as responsibly as possible. You can ensure this by understanding the fiduciary responsibility of HOA board members.
Fiduciary duties commonly exist in the context of businesses and corporations. Corporate law mandates that since a corporation’s board of directors is placed in a position of trust and authority, they have a fiduciary duty to the corporation and its stockholders.
How does this relate to the fiduciary duty of directors of homeowners associations? Do HOA board members have a fiduciary responsibility?
Most HOA communities have articles of incorporation in their governing documents, which establishes them as non-profit corporations. Even though they are non-profits and board members are volunteers, HOA communities also follow corporate law. This means that an HOA board of directors has a fiduciary duty to their association and its members.
A fiduciary duty (or fiduciary responsibility of HOA board members) is defined as the obligation that a fiduciary owes to the beneficiary.
In this context of HOAs, the fiduciary is the board of directors and the beneficiary is the association (and its homeowners). Since fiduciaries are placed in a position of trust and authority — meaning they can act on behalf of the association — it is their legal duty to act in the best interests of their beneficiary, the HOA.
What are the fiduciary duties of a board member? The fiduciary duty of HOA board members has three components: duty of loyalty, duty of care, and duty to act within the scope of authority.
Duty of loyalty requires HOA board members to act in good faith to promote the best interests of the entire association. HOA board fiduciary responsibility prevents board members from making decisions to further their personal interests. Board members must also avoid an HOA board of directors conflict of interest. This includes choosing a vendor owned by family members or voting on an issue that the board member may be biased about.
Duty of care requires HOA board members to make informed decisions regarding HOA matters. However, corporate law acknowledges that board members are constantly faced with countless decisions and it is impossible to thoroughly review information related to each decision. As such, the board of directors can rely on other people such as an HOA manager or staff to provide the information necessary to make a decision. However, the HOA board of directors is still responsible for making the final decision.
The duty of care board of directors is expected to uphold can apply to several situations, including imposing fines on homeowner violations. An HOA board member must first make sure that he/she is up-to-date on the association’s rules and regulations. You can’t simply fine a homeowner for doing something that you don’t like. HOA boards must follow the protocol for fines, which is clearly outlined in the bylaws.
In this third component, board members are required to only act within the scope of their authority. They cannot act or make decisions on matters that are outside the boundaries of their roles and HOA responsibilities to homeowners. HOA board members must read their governing documents to educate themselves on the limitations of their authority.
Board members must also know that governing documents do not supersede local, state, and federal laws. As such, a community that prohibits pets cannot refuse a homeowner with a disability who has a service animal. A board member who rejects the disability needs of the homeowner is acting outside the scope of authority because he/she is already violating the Fair Housing Act.
HOA fiduciary duty protects both the association and its board of directors. For associations, imposing fiduciary duties on the board of directors encourages them to act responsibly at all times. If they do not fulfill their fiduciary obligations to the association, they will be held accountable for their actions.
Meanwhile, the fiduciary duties of HOA board members also protect them from personal liabilities. For instance, a disgruntled homeowner can sue a board member for making bad decisions.
However, if the court can prove that their decision was in the best interest of the community — regardless of the bad outcome — the business judgment rule will not hold them personally liable. This empowers board members to serve their community without fear of losing their personal assets.
Most associations have an indemnification clause, which allows board members to reimburse legal expenses in case they are sued. If you want to protect the finances of your association, think about purchasing directors & officers (D&O) insurance coverage.
Upholding your fiduciary duties is a mark of being a good HOA board member. Board members can fulfill their duty of loyalty by prioritizing the needs of the community. Keep in mind that as a homeowner yourself, the success or failure of the community will also affect you. As such, put aside your personal interests when dealing with HOA matters.
Meanwhile, board members can uphold their duty of care by thoroughly understanding their duties and responsibilities — and by always trying to fulfill these obligations to the best of their ability. Board members should also understand their governing documents, especially CC&Rs, bylaws, and articles of incorporation. You can fulfill your duty to act by knowing the scope of your authority and obligations. Moreover, board members must also be up-to-date on local, state, and federal laws.
When a breach of fiduciary responsibility takes place, the HOA may find itself in legal trouble. Suing for HOA negligence, which may be interpreted as a breach of fiduciary duty, is a common thing. But, what are some examples of breaches you might encounter?
By far the best way to avoid a breach of fiduciary duty lawsuit is to approach your job as a board member with seriousness. Make sure to understand your governing documents and follow them to the letter. Fulfill the roles and responsibilities required of you. And always put the community’s interests first.
The three fiduciary duties board members of an HOA should uphold are the Duty of Care, the Duty of Loyalty, and the Duty to Act Within the Scope of Their Authority.
Yes, homeowners can sue HOA for breach of fiduciary duty. This will usually require the homeowner to offer proof that a breach has taken place, though. Additionally, it is important to note that lawsuits cost money, and the HOA likely has D&O insurance to cover legal fees and damages.
Homeowners can name individual board members in their lawsuit against the HOA. That does not automatically mean, though, that the named party will become liable.
In most cases, board members are not personally liable for negligence or an error in judgment. Many state laws and governing documents also limit the personal liability of board members. But, when a board member has exhibited willful misconduct or made decisions or actions in bad faith, then a court may find them personally liable.
Homeowners can sue their HOA for several reasons, and one of them is for failing to enforce rules. This is considered a breach of fiduciary duty board of directors is expected to uphold. Specifically, it is a breach of the duty of care. Keep in mind, though, that homeowners will need to provide proof for this claim. It is usually best for homeowners to first approach the HOA board about the issue before taking legal action.
When homeowners feel like the HOA board is not enforcing the rules in a consistent or equal manner, they can sue the HOA for selective enforcement. Again, this will require proof on the homeowner’s part.
Board members should not treat their fiduciary duties as a burden or something that they always have to worry about. Rather, treat the fiduciary responsibility of HOA board members as a reminder to always take care of your community.
When homeowners see that their HOA board is acting responsibly, the more they can trust you with the community. Board members can also take pride in their service to the community. It is a rewarding feeling knowing you helped protect your community’s value, which, in turn, enabled it to grow into a bigger and more successful homeowners association.