A board’s fiduciary duties are one of the most important aspects of their HOA role. Navigating the essence of what a fiduciary is and what it takes to ensure every board member is maintaining their obligations is necessary in order to do what’s in the best interest of the community.
Keystone asked HOA attorney Kumar Raja, Esq. from Beaumont Tashjian to lend his expertise on the subject of fiduciary responsibilities. By defining key terms, clarifying responsibilities, and highlighting the liability protection board members have available to them, the intent is to empower and instill confidence to successfully fulfill the role.
What Is a Fiduciary?
A fiduciary is a person who sits in a position of trust. A fiduciary is entrusted to perform certain obligations for the benefit of others. In the community management context, those elected to the board of directors are fiduciaries acting in the best interest of all members. Thus, fiduciary responsibility is a duty owed by the board to the community overall, putting HOA interests ahead of its own with a duty to exercise due care and undivided loyalty to the interests of the corporation. Being a fiduciary requires being bound both legally and ethically to act in others’ best interests. It is one of the highest standards of care recognized by law.
What Are the Duties of Fiduciary Responsibility?
Directors of nonprofit corporations, such as community associations, are fiduciaries who are required to exercise their powers in accordance with the duties set forth by California law. This fiduciary relationship is governed by the statutory standard that requires directors to exercise due care and undivided loyalty to the HOA.
Duty of Care
The duty of care is often referred to as the duty to perform due diligence or duty to investigate. It requires board members to be active participants by regularly attending board meetings, asking questions about HOA matters, and making informed decisions that are fair and in the best interest of the community. Exercising due care means that boards of directors must enforce the governing documents, even if that decision may not be popular with the membership.
Board members are held to a high standard of conduct and responsibility. A breach of the duty of care can play out in a number of ways. Sometimes it is unintentional, like when an individual board member takes their director position lightly. An individual may choose to not fully participate in HOA business by not showing up to or voting at board meetings or by not engaging in the process on a consistent basis.
Essentially, those in breach are disinterested in the process. They’re individuals who have agreed to volunteer as a board member and then don’t carry out their responsibilities. Perhaps, in these cases, the idea of being a board member sounds more enticing than the actual work necessary to uphold the required responsibilities.
Duty of Loyalty
The duty of loyalty is a pledge by the directors to protect the interest of the association and refrain from doing anything to jeopardize or harm it. Board members agree they will not take advantage of their director position and not derive personal benefits based upon their board member status.
The duty of loyalty ensures that community directors cannot use their position of trust and confidence to further their private interests by embezzling funds or steering contracts to family members or friends that result in personal benefits at the expense of the association. Violation could result in liability for all profits obtained, all damages as a result of the breach, and punitive damages.
Properly disclosing potential conflicts of interest is the best way to avoid any accusation of a breach of loyalty by alerting fellow board members of an actual or potential conflict of interest. Then, leave the decision to the entire board to make the ultimate and collective choice of contracting services with a family member or close friend. In addition, the director may voluntarily abstain from voting. The takeaway is to disclose possible conflict of interest, which affirms the director’s undivided loyalty to the HOA.
Liability Protection for Fiduciary Decision-Making
Volunteer community association officers are not personally liable to third parties for monetary damages from negligent acts or omissions in the performance of their duties. Liability protection is necessary in order to recruit people to serve on association boards of directors.
Since oftentimes those serving on the board are not professional community managers, but instead, well-meaning neighbors who volunteer their time to help shape and manage the activities of the HOA, it’s necessary for board members to feel protected in their roles. Boards of directors are therefore protected in the following ways:
- D&O Insurance: Directors and officers insurance protects against errors and omissions made while serving on behalf of the community.
- Statutory Protection: The Davis-Stirling Act protects volunteers from personal liability while on the board of directors provided they meet certain criteria. They are also protected under Corporations Code and can be indemnified by their association if they had no reasonable cause to believe their conduct was unlawful. Discharging a fiduciary obligation is closely related to a business judgment rule, which is one of the most fundamental protections available for individual directors.
- Governing Documents: Typically, an association’s CC&Rs and bylaws both contain hold harmless and indemnity provisions, which protect officers and directors from liability for negligent acts and omissions while in office.
- Case Law: Although the board of directors of an HOA are the policymakers that control the association’s conduct, they generally do not possess liability for torts of the association. Directors of an association cannot be held liable as individuals unless they personally participated in a wrongful action.
- Volunteer Protection Act of 1997: Some associations may benefit from additional protections under the Volunteer Protection Act of 1997. Directors are shielded from liability for an act or omission provided the volunteer acted within the scope of his or her responsibilities in the nonprofit organization and the harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct or a conscious, flagrant indifference to the rights or safety of the individual harmed, as well as other stipulations.
With these in place, the association can defend and indemnify the individual director under the terms of governing docs provided they acted in good faith and in the best interest of the association.
Empowering Board Members in Their Roles
Every volunteer board member cannot be expected to make perfect decisions all of the time but is expected to act in the best interest of the community by staying informed, soliciting support as needed, and acting as a unified team. To guide new directors through the process, Keystone holds new board member orientations to educate them on community responsibilities and HOA best practices.
To prevent actions taken by “rogue board members,” ongoing board member education, possibly with legal counsel, is valuable. Additionally, a refresher regarding the code of conduct can be effective. Typically, this is when an HOA board and community management team sit down together with a list of targeted duties and/or best practices (i.e. not publicly speaking about association business). Though board members separating themselves from the group by acting on a personal agenda is unlikely, keeping an eye out for possible deviation is critical. Censuring and/or disciplinary actions may be necessary to protect the community.
Together Is Better to Achieve a Community’s Shared Goal
Being a board member is an important and rewarding experience, one that sustains a thriving community and creates positive change for the environment that is called home. However, it’s important for all association members to note that an individual board member has no power in actions taken alone, but as a group, the board has absolute power. When working together as one, great things can happen.
Therefore, it’s critically important for board members to stay connected and put the community first. Additionally, homeowner engagement is encouraged to stay informed by attending board meetings to ensure fiduciary obligations are upheld. Sending updates through emails, newsletters, and website postings is also best practice to keep all members aligned and informed. Whatever the communication method, the goal is to speak as one, authorized voice.
At Keystone, our community association management teams provide insight, resources, and support to help ensure fiduciary obligations are being met and community goals are achieved. Want to learn more about how our services can help your community? Contact us today to get the conversation started.