FIDUCIARY DUTIES OF HOA BOARD MEMBERS

  2-Minute Video

Director Fiduciary Duties 

Fiduciary Duty: A duty to act for someone else's benefit while subordinating one's personal interest to that of the other person is the highest standard of duty implied by law (e.g., trustee, guardian). -Black's Law Dictionary

Association Fiduciary Duties. A homeowners' association has a fiduciary relationship with the membership as a whole and not with individual members' interests. (Frances T. v. Village Green Owners Ass'n (1986) 42 Cal.3d 490, 513)

[I]n recognition of the increasingly important role played by private homeowners’ associations…the courts have recognized that such associations owe a fiduciary duty to their members. (Cohen v. Kite Hill Community Ass'n (1983) 142 Cal.App.3d. 642, 650-651)

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.” (Frances T. v. Village Green Owners Ass'n (1986) 42 Cal.3d 490, 513)

Generally, fiduciary duties owed by a homeowners association to its members are limited to those arising from its governing documents and relevant statutory requirements. (Golden Eagle Land Investment, L.P. v. Rancho Santa Fe Ass'n (2018) 19 Cal.App.5th 399, 425; Ostayan v. Nordhoff Townhomes Homeowners Ass'n, Inc. (2003) 110 Cal.App.4th 120, 129)

Director Fiduciary Duties. Board members must act with the utmost good faith and reasonable care to benefit the association and its members. It applies to directors of both incorporated and unincorporated associations.

It is well settled that directors of nonprofit corporations are fiduciaries. (Raven’s Cove Townhomes, Inc. v. Knuppe Dev'l Co. (1981) 114 Cal.App.3d 783) 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 Owners Ass’n (1986) 42 Cal.3d 490) In addition to the duty of care, directors owe the association a fiduciary duty of loyalty. (Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345) That means protecting the interests of the association and refraining from doing anything that would injure it. (Id. at 345)

Duty of Care (to Investigate)

"Due diligence," or the duty to investigate, is one of the fiduciary duties of directors. Association boards of directors must make reasonable inquiries regarding issues brought before the board. This does not mean directors must personally inspect water leaks or speak with vendors — they can rely on managing agents, committees, or others to gather information for their review and discussion.

A director cannot close his eyes to what is going on around him in the conduct of the corporation's business and have it said that he is exercising business judgment. (Burt v. Irvine Co)

We hold that where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. (Lamden v. La Jolla Shores)

[I]n Lamden, ample evidence demonstrated the association board engaged in the sort of reasoned decisionmaking that merits judicial deference... [p]roof . . . that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by that doctrine.'”].) (Palm Springs Villas II v. Parth)

The term "under similar circumstances" requires a court to consider the nature and extent of a director's alleged oversight or mistake in judgment in the context of such factors as the size, complexity and location of activities involved, and to limit the critical assessment of a director's performance to the time of the action or non-action and thereby avoid the harsher judgments which can be made with the benefit of hindsight (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d. 1250, 1265)

Competent Advice. Boards may rely on the advice of persons they believe to be reliable and competent in the matters being presented. (Corp. Code § 7231(b)) This means boards can rely on CPAs for financial and tax matters, and on attorneys for legal matters, etc. Good faith reliance on the advice of counsel provides a defense even if that counsel's advice later proves to be legally unsound (Melorich Builders, Inc. v. Superior Court (1984) 160 Cal.App.3d 931, 936-37) Following is a list of some of the advisors boards commonly rely on:

• Accountants
• Attorneys
• Bankers
• Consultants (elevators, roofing, architects, engineers, etc.)
• Insurance brokers/agents
• Managers
• Reserve specialists
• Vendors (landscapers, roofers, plumbers, electricians, etc.)

Directors must be diligent and careful in performing the duties they have undertaken. (Burt v. Irvine Co) Directors must:

1. Attend and participate in meetings to inform them about the association's business.
2. Make reasonable inquiries regarding maintenance issues, rule violations, etc.
3. Make decisions.
4. Keep corporate records.
5. Enforce the governing documents.
6. Oversee the association's finances.

Duty of Loyalty

In addition to the duty of care, directors and officers owe the association a fiduciary duty of loyalty. (Bancroft-Whitney Co. v. Glen (1966) 64 Cal. 2d 327, 345) That means protecting the association's interests and refraining from anything that would injure it. (Bancroft-Whitney, supra. at 345.) It includes the following:

1. No Self-Dealing. Directors cannot use their position of trust and confidence to further their private interests. They must act in the association's best interests, even at the expense of their own. 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 association's expense. 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)
2. See Director Conflicts of Interest.
3. Duty of Confidentiality. The duty to keep confidential matters confidential falls under the duty of loyalty. Breaching the duty of confidentiality could harm the association, thereby breaching the Duty of Loyalty. 
4. Duty to Preserve Common Areas. Boards must protect, preserve, and enhance the association's assets. An association's primary asset is the common areas.
5. Duty to Support Board Decisions. The duty of loyalty can extend to supporting board decisions. Because board members are entrusted with the association's money and property, they must avoid conflicts of interest.

Duty of Confidentiality

Board members must keep confidential information confidential. The authority to release information rests with the board as a whole, not with individual directors. Once the information is released, it cannot be taken back. Accordingly, directors who release information without board approval could face significant consequences.

Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348-49 (1985) (power to waive the corporate attorney-client privilege rests with the corporation’s management and is normally exercised by its officers and directors; the managers, of course, must exercise the privilege in a manner consistent with their fiduciary duty to act in the best interests of the corporation and not of themselves as individuals); See People ex. rel. Spitzer v. Greenberg, 50 A.D.3d 195, N.Y.S. 2d 196, 200-01 (2008); See Stewart Equip. Co. v. Gallo, 32 N.J. Super. 15 (Law Div. 1954) (The attorney-client privilege applies to a corporation and can only be waived by the corporation; the act of an officer of a corporation is not regarded as the act of the corporation, unless authorized); See Lane v. Sharp Packaging Sys., Inc., 2002 WI 28, 251 Wis. 2d 68, 98-99 640 (holding former director could not waive lawyer-client privilege on behalf of corporation.)

Executive Session Topics. All matters covered in executive session meetings are confidential. 

Continuing Duty. While the fiduciary duties of a director or trustee terminate when the director or trustee ends his or her term, the duty to protect and preserve confidential information received during service as a director continues after the director leaves the board. "[While] the fiduciary duties of a director or trustee terminate when the director or trustee ends his or her tour of duty, the duty to protect and preserve confidential information received during service as a director continues after the director leaves the board." (In re Mortgage & Realty Trust (1966) 195 B.R. 740, 750) For most executive session matters, confidentiality should extend indefinitely. It includes personnel matters, an owner's delinquency payment plan, disciplinary actions, and attorney-client privileged communications.

Other Board Duties. A board is obligated to perform a number of other duties in addition to its fiduciary duties. See "Board Authority and Duties." 

Drunk Directors

Serving wine at board meetings is not illegal, but it could present problems. If directors drink excessively, their judgment will be impaired when making decisions for the association. Also, if they injure themselves on the way back to their residence, claims could be made against the association's insurance. However, if their drinking is light — one glass of wine —it should be harmless. However, if a director gets drunk or attends meetings already drunk, that is a problem. To avoid personal liability for their actions/decisions, directors must perform their fiduciary duties "with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." (Business Judgment Rule) That standard is hard to meet when a board member attends meetings under the influence of drugs or alcohol.

Under those conditions, a director's judgment is impaired. If the impairment is self-induced, a jury could find that the director was behaving with reckless indifference or deliberate disregard for his/her obligations to the membership. If so, it would be an abdication of their duties as a director. Such behavior is specifically excluded from protection under Corporations Code § 204(a)(10)(iv)&(v), i.e., it exposes a director to personal liability. What impact does it have on fellow directors? The worst-case scenario is the drunk director gets into a fight with and seriously injures a homeowner at a board meeting. The injured owner then sues the board for failing to take action against the inebriated director earlier. While the likelihood of success against all directors would depend upon the foreseeability of the impaired director's actions, the lawsuit would certainly succeed against the problem director. The plaintiff would also prevail against the association since the director's actions occurred while in his official capacity.

If the board does nothing, it effectively condones the director's bad behavior, which could be used against the board at trial. To protect themselves and the association, fellow directors should warn the impaired director to go home and sleep it off and never again appear at a meeting intoxicated. If the bad behavior continues, the board should censure the director. If the director is an officer, he can be removed from office by fellow directors. Unseating him from the board is not an option unless the bylaws specifically authorize it. That is something normally reserved for the membership via a recall election. Even so, the board can, on its own initiative, initiate a recall and put the matter before the membership for a vote.

If boards have not already done so, they should adopt a "Code of Conduct" or "Ethics Policy" to address such situations. It gives fellow directors something to reference when talking to a wayward director and provides a stronger basis for censure.

Breach of Fiduciary Duties

Board members are held to a high standard of conduct, the breach of which may subject each or all of them to individual liability. (Raven's Cove v. Knuppe) Board members can, however, make both correct and incorrect decisions, so long as they are faithful to the corporation and exercise their best business judgment. (Behan v. Lido Isle) If a director discloses confidential information without prior board approval, that director acts outside his/her scope of authority and could be personally liable for claims of defamation, invasion of privacy, violations of statutes, etc. The association's insurance would likely not cover any judgments against the director. "Where it can be shown that a director seeks information to damage the corporation, the director's claim that he needs the information to fulfill his fiduciary duties to the corporation has no merit." (Washington ex rel. Paschall v. Scott, 247 P.2d 543 (Wash. 1952)) Directors who breach their duties can be censured. 

Business Judgment Rule

Courts will use the Business Judgment Rule to determine whether directors violated their fiduciary duties. To avoid potential breaches, boards should adopt an ethics policy to guide directors. “Notwithstanding the deference to a director’s business judgment, the rule does not immunize a director from liability in the case of his or her abdication of corporate responsibilities.” (Palm Springs Villas II v Parth) "A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.'” (Burt v. Irvine Co)

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