Fiduciary Duty: A duty to act for someone
else's benefit, while subordinating one's personal interest to that of
the other person. It is the highest standard of duty implied by law
(e.g., trustee, guardian). -Black's Law Dictionary
Because board members are entrusted with the money and property of the association they are held to a higher standard and must avoid conflicts of interest
. They are deemed "fiduciaries" and have a duty to act in the best interests of the membership.
A homeowners association has a fiduciary relationship with its
members. (Cohen v. Kite Hill.)
It is well settled that
directors of nonprofit corporations are fiduciaries. (Raven's Cove v. Knuppe.)
Directors of nonprofit corporations such as the Association are fiduciaries who are required to exercise their powers in accordance with the duties imposed by the Corporations Code. This fiduciary relationship is governed by the statutory standard that requires directors to exercise due care and undivided loyalty for the interests of the corporation. (Francis T. v. Village Green.)
Two Broad Duties. Upon their election to the board of a common interest development, directors become fiduciaries with powers to act on behalf of the association. As fiduciaries, directors are held to a higher standard of conduct and have two primary duties: (i) duty of care, and (ii) duty of loyalty. This applies to directors of both incorporated and unincorporated associations.
A. DUTY OF CARE (Due Diligence; Duty to Investigate). Directors must be diligent and careful in performing the duties they have undertaken. (Burt v. Irvine Company.) Directors must:
1. Attend and participate in meetings so they can be informed about the association's business.
2. Make reasonable inquiry re maintenance issues, rules violations, etc.
3. Make decisions.
4. Keep corporate records.
B. DUTY OF LOYALTY (No Self-Dealing). Directors must act in the best interests of the association even if at the expense of their own interests. This is more than just embezzlement of funds; it includes steering contracts to family members or taking actions that result in personal benefits to the director at the expense of the association. Violation could result in (i) liability for all profits received, (ii) all damages caused by the breach, and (iii) punitive damages.
"We note that the duty of undivided loyalty applies when the board of directors of the association considers maintenance and repair contracts, the operating budget, creation of reserve and operating accounts, etc. Thus, . . . [directors] may not make decisions for the association that benefit their own interests at the expense of the association and its members." (Raven's Cove v. Knuppe.)
The duty of loyalty can extend to the support of board decisions.
Business Judgment. In determining whether directors violated their fiduciary duties, courts will use the Business Judgment Rule. To avoid potential breaches, boards should adopt an ethics policy to guide directors.
Personal Liability. As volunteers, directors are protected from personal liability through the governing documents and various laws provided they meet certain standards. See "Protections Against Liability."
Statute of Limitations. The statute of limitations for an action against an association or board member for breach of fiduciary duties is three (3) years from the discovery of the wrongful act. (Smith v. Superior Court.)
ASSISTANCE: Associations needing legal assistance can contact us.
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