“any attorney providing advice to the board most likely represents the HOA and its residents, not board members individually. If a board member’s personal interests diverge from those of the HOA or its residents, a conflict of interest may arise and it may be prudent for that board member to consult a different attorney in order to fully understand his or her rights and obligations.”
Fiduciary Relationship and Responsibility
The members of the board of directors and each officer of the association have a fiduciary relationship with the members of the association. This fiduciary relationship imposes obligations of trust and confidence in favor of the corporation and its members. It requires the members of the board to act in good faith and in the best interests of the members of the association. It means that board members must exercise due care and diligence when acting for the community, and it requires them to act within the scope of their authority.
The fact that the association is a not-for-profit corporation, or that the members of the board are volunteers and unpaid, does not relieve them from the high standards of trust and responsibility that the fiduciary relationship requires. When a member accepts a position on the board of directors, he or she is presumed to have knowledge of the duties and responsibilities of a board member. Board members cannot be excused from improper action on the grounds of ignorance or inexperience and liability of board members for negligence and mismanagement exists in favor of the association and the property owners.
Each board member must recognize the fiduciary relationship and the responsibilities that the board has to the association and each of its members. The board’s duties must be performed with the care and responsibility that an ordinary prudent person would exercise under similar circumstances, and the ultimate responsibilities of these unique positions cannot be delegated to a manager, a management company or other third party.
Individual Member – Legal Ramifications of Joining Homeowners’ Association Boards
The average member of the board of directors of a typical homeowners’ association is a resident with a “day job” who volunteers because someone has to do the work. Board members have the best intentions, but often receive little training about the new legal duties that come with the position as well as the possibility of exposure to personal liability.
Board members generally owe a fiduciary duty to the organization – in this case, the HOA (and possibly its owners). When they act as board members, they must place the interests of the organization before their own personal interests.
That means that a board member who has a conflict of interest, such as a direct or indirect interest in the outcome of a board vote that prevents a decision from being made with the HOA’s best interests in mind, should disclose that conflict to all other board members. HOA governing documents may specify a process for curing conflicts, but board members cannot follow the process if they don’t know about the conflict.
This is where size can be a big help. Large corporations have entire departments dedicated to human resources and benefits administration; HOAs do not. Instead, the HOA, by and through the board members, are expected to “run the company” as well as its employees – such as groundskeepers, maintenance persons and/or property managers.
Board member knowledge
Board members are expected to take prompt and effective action when they receive certain kinds of information, regardless of whether that information is delivered in a board meeting or passed along casually by a fellow resident. Once a board member knows something, it may not really matter how the information was learned.
To bring some order from the chaos that may result, HOA boards can adopt a communications policy that specifies who residents should contact with certain types of questions. Allegations of harassment, discrimination, conflict of interest or fraud should be taken seriously and investigated promptly. Investigations (and investigators) should neither be biased nor appear so.
Accusations of misconduct
If a board member is accused of misconduct, the board must ensure that the employee or resident making the accusation is able to do so free of retaliation. Board members also may have to recuse themselves from the investigation and/or decision-making process depending on the nature of the accusations.
Insurance and indemnity
When claims are asserted, HOA policies or insurance policies may indemnify board members by holding them harmless or at least reimbursing the cost of defense. However, even if those policies do exist, board members may lose protection under the applicable policies if they fail to act in good faith and in the best interests of the organization.
There are times when board members must be particularly careful to maintain the confidentiality of HOA board information. Attorney-client privileged advice received from the HOA’s attorney and information transmitted during the executive session portion of a board meeting should not be disclosed to other residents or third parties because doing so many waive the applicable privilege.
Executive session should be used carefully and limited mostly to situations in which the board will: evaluate or consider disciplining an employee; review and discuss a complaint against an employee or board member; or exchange privileged communications with the HOA’s attorneys.
HOA boards need to pay close attention to legal filings received by the HOA as well as threats of litigation sent by attorneys representing employees, residents or third parties. There are often legal deadlines for answers and responses.
HOAs have a duty to notify their insurance carriers within a short window of time after receiving notice of a claim. Failure to notify the insurance carrier and tender defense of the matter to the insurance company may result in a loss of coverage.
Finally, any attorney providing advice to the board most likely represents the HOA and its residents, not board members individually. If a board member’s personal interests diverge from those of the HOA or its residents, a conflict of interest may arise and it may be prudent for that board member to consult a different attorney in order to fully understand his or her rights and obligations.
Prospective board members shouldn’t be dissuaded from serving just because there may be legal challenges associated with serving on the board of a HOA. Certainly, it is wise to take a step back and evaluate how functional the board is and how deeply rooted any problems are before joining the board; however, that is precisely when the service of energetic and thoughtful board members is most needed.
Board members will do well to stay informed; keep the lines of communication between board members, residents and employees open; and tackle problems promptly and directly if and when they arise. Sound legal or other professional advice can help HOA boards work through a complicated issue that falls outside the scope of board members’ expertise.
Andrew Schpak, an attorney with Barran Liebman LLP, represents management in employment litigation and provides advice in employment matters. Contact him at 503-276-2156 or firstname.lastname@example.org.