Community Associations Update - September 2011

Date: September 19, 2011

Fiduciary Duty

Members of a Community Association Board are sometimes confronted with an accusation that they have breached their fiduciary duty -- that is, the duty they owe their fellow owners to act impartially in the best interest of the entire community.

There is no question that Board members owe a fiduciary duty to their fellow owners. If you think about it, it makes sense because the Board oversees the funds that the owners have paid into the community as well as having the power to govern the conduct of the owners and the upkeep of the common areas. Of course, with such authority comes responsibility.

However, the term "breach of fiduciary duty" tends to get thrown about whenever a non-board member owner disagrees with a Board decision. Clearly, such a broad definition is inaccurate and unfortunate. Thus, it is important for Board members to understand the duty and to watch for behavior which might actually get them in trouble.

Many individuals have a fiduciary duty to act in the best interest of others. For example, real estate agents owe a fiduciary duty to their clients. The most common example relates to the duties a trustee owes a trust. Similarly, owners in a common interest community are entitled to rely on the members of the Board to act in good faith and in the best interest of the community.

Board members can get into trouble if they start acting outside the best interests of the community. Here are five examples of problems:

First, sometimes Board members grant themselves privileges to which the other owners are not entitled. Unfortunately, experience has shown that some members of the Board think it is okay to absolve themselves from the responsibility of paying assessments. Clearly, such is not the case. If members of the Board want to give themselves a special privilege they should first contact counsel to ensure they are not treading on thin ice.

Second, Board members can get into trouble by deviating from the plain language of the governing documents. It is true that the Board is given fairly substantial powers in the documents. However, that power is not limitless. There are a number of activities that need the approval of a majority of the association. In these circumstances, the Board cannot conduct these activities without getting that approval. In other instances, Boards innocently will enact rules and/or resolutions that are contrary to the governing documents. Once again, the governing documents trump the rules and enactment and enforcement of such rules could pose a problem.

Third, Board members may get themselves in trouble by not disclosing that they have an interest in a contract being considered. If your brother-in-law is a landscaper, he is free to provide a proposal for services to the Association. However, if he does, you should disclose the relationship and "recuse" yourself (i.e., abstain) from voting on that issue. If in doubt about whether there is a real or important self-interest, always err on the side of disclosing. It is, without a doubt, the better course of action, and the safer one.

Fourth, Board members are provided a substantial amount of confidential information during their tenure on the Board. That information should remain confidential and should not be disclosed to others who are not on the Board. If the matter was discussed in executive session it should not be discussed elsewhere.

Finally, members of the Board should note that they are representatives of the Association at all times. A stray comment by a Board member, even if it is outside a meeting, may still bind the Association. If a Board member is wondering whether or not to make a comment, it is much safer to keep your thoughts to yourself until you've asked the Association's lawyer about what to say.

Much of this is common sense. However, in some jurisdictions the duties imposed on a Board of Directors are dictated by statute. Therefore, if any member of the Board has a question counsel should be consulted.

Board members can further protect themselves by thoroughly reviewing the documents (if you have a document review letter prepared by counsel so much the better) and reviewing the Board packages so that they are fully prepared for meetings.