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FIDUCIARY DUTIES OF HOA DIRECTORS

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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

Association Fiduciary Duties. A homeowners association has a fiduciary relationship with its members.

[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 Assn. (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 Assn. (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 Assn. (2018) 19 Cal.App.5th 399, 425; Ostayan v. Nordhoff Townhomes Homeowners Assn., Inc. (2003) 110 Cal.App.4th 120, 129.)

Director Fiduciary Duties. Board members have a duty to act with the utmost good faith and reasonable care for the benefit of the association and its members. This applies to directors of both incorporated and unincorporated associations.

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.)

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.

5. Enforce the governing documents.

B.  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 interests of the association and refraining from doing anything that would injure it. (Bancroft-Whitney, supra. at 345.) This 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 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.)

See Director Conflicts of Interest.

2. Duty of Confidentiality. A duty to keep confidential matters confidential falls under the duty of loyalty. Breaching the duty of confidentiality could result in harm to the association, which would be a breach of the Duty of Loyalty. See "Director's Duty of Confidentiality."

3. Duty to Preserve Common Areas. Boards have a duty to protect, preserve and enhance the assets of the association. An association's primary asset is the common areas.

4. Duty to Support Board Decisions. The duty of loyalty can extend to the support of board decisions. Because board members are entrusted with the money and property of the association they must avoid conflicts of interest.

Breach of 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 mebers can, however, make incorrect decisions, as well as correct ones, so long as it is faithful to the corporation and uses its best business judgment. (Behan v. Lido Isle.)

Delegating Duties. Upon their election to the board of directors of a common interest development, boards have the authority and duty to act on behalf of the association. Boards can delegate many of their duties. However, there are some duties that are nondelegable

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. “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.)

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. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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