One of the biggest concerns that we see with our clients is the fulfillment of fiduciary duties. What are they? Are they being met? What liability is associated with them?
In order to fully understand these “duties,” it is important to know what a fiduciary is. Encyclopedia Britannica states that a fiduciary is: “a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents. Examples of fiduciaries are agents, executors and administrators, trustees, guardians, and officers of corporations. They may be contrasted with persons in an ordinary business relationship, in which each party is free to seek purely personal benefits from his transactions with the other.”
A board member of an HOA has multiple fiduciary duties that need to be met. The first of these duties is the Duty of Care. Fulfilling the Duty of Care means to act with the care of a reasonable prudent person. It also means that a board member needs to act in the best interest of the HOA, and to do so in good faith. A board member who meets this duty will regularly attend board meetings. In considering options that are presented to the board they will exercise independent judgment. In exercising independent judgment they will ensure that they are informed, and relying on expert advice in making decisions concerning the HOA.
The next duty is the Duty of Undivided Loyalty. This duty highlights the fact that board members need to avoid conflicts of interest. If the board is presented with a matter that presents a conflict of interest to an individual board member, that board member should be recused from voting on the issue. A classic example of a conflict of interest is when a board member is presented with an opportunity to enter a self-serving transaction. A self-serving or self-dealing transaction consists of a fiduciary taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the homeowners. When a fiduciary engages in self-dealing, she breaches the Duty of Undivided Loyalty by acting in her own interests instead of the interests of the represented party.
Finally, board members are faced with the Duty to Act Within the Scope of Authority. Essentially, what this means is that board members have an obligation to know and understand their duties as outlined in the declaration, bylaws, and Utah (or any state) code. Additionally, board members who exceed their authority and cause damage, may be personally liable for their unauthorized actions. This duty also contains a requirement of confidentiality.
The business judgment rule protects from liability board members who act in good faith, without fraud, self-dealing, or unconscionability, provided their actions are authorized by law. A board member who decides to disclose confidential information contrary to the determination of the majority of the board generally cannot claim the protection of the business judgment rule because such board member’s action is not authorized by law. A single board member has no authority to act on behalf of the HOA and cannot lawfully take action contrary to the decision of the majority.
A board member has a fiduciary duty to the HOA to maintain confidentiality of materials determined by the board as a whole to be confidential. A single board member has no right to unilaterally reject that determination.
By utilizing standard business management practices, board members can substantially reduce the risk of litigation for breach of fiduciary duties. Forward thinking, team work, and solid leadership are the correct elements for a successful HOA. Board members need to ensure that applicable law and governing documents are properly followed. Professional advisors, including attorneys, accountants, reserve study consultants, engineers, architects, insurance brokers and community association management consultants are among the paid advisors who may be engaged to either advise on a narrow issue or more broadly help board members understand and comply with their legal standard of care.