Are We Making the Right Decision? Fiduciary Duties and the Business Judgment Rule

Are We Making the Right Decision? Fiduciary Duties and the Business Judgment Rule

July 3rd, 2011

Author:  Kevin V. Harker

Board members of homeowners associations are frequently faced with decisions that have significant impact on the owners within the association. Should the board require an owner to remove a fence that was installed without permission? Should the board hire the treasurer’s brother to paint the condominium? Should the board increase monthly dues to meet a budget shortfall? These are some of the questions boards often face and with which they struggle.

Members of a board of directors owe “fiduciary duties” to the association. Put simply, this means that board members must always act in the best interest of the association and not in the interest of individual owners or board members. Further, a board member must avoid all conflicts of interest and self-dealing. The law imposes this higher standard of care on board members because entire communities depend on board members to operate and maintain the association. This means enforcing the provisions of the governing documents, maintaining property for which the association is responsible, and purchasing adequate insurance.

Decisions by a board are judged on a related legal principle: the business judgment rule. This rule says that if a board member makes a decision after researching and understanding the significance and consequences of the decision, generally the board member will be protected from liability even if the decision turned out to be a bad one.
The rule requires that board members diligently investigate facts and circumstances prior to making decisions, act in good faith, and discharge their duties with reasonable care. Lastly, the rule requires board members to exercise supervision over individuals or entities to whom authority is delegated.

With the preceding principles in mind, there are several things individual board members can do to protect themselves from personal liability. Examples include: (1) Attend and participate in all board meetings (remember, board members cannot give proxies!), (2) avoid conflicts of interest, (3) become familiar with the provisions in the Declaration, Bylaws, and rules and regulations, and (4) stay informed of all association business.

Although it is impossible to completely eliminate personal liability when acting as a board member, adhering to the general principles of the business judgment rule and properly exercising fiduciary duties will help to ensure that board members are not exposed to personal liability while acting in their capacity as board members. And remember, the business judgment rule is never a substitute for adequate directors and officers insurance!

Kevin V. Harker
Attorney at Law
kvh@vf-law.com