HOA Board’s Fiduciary Duties Under Corporate Law
The fiduciary duties of HOA Board members mainly arise from state corporate law. Most HOAs are nonprofit corporations, typically formed by filing articles of incorporation in the state where the development is located. Recognizing that a corporation’s board members serve in a position of trust, every state’s corporation law imposes a fiduciary duty on the corporation’s board of directors, requiring them to act in the best interest of the corporation.
Subject to some limitations, this fiduciary duty applies to HOAs even though they are typically nonprofit corporations, and even though HOA board members are usually volunteers.
A Board member’s fiduciary duties involve three basic components: the duty of care, the duty of loyalty and the duty to act within the scope of its authority.
THE DUTY OF CARE
To meet the duty of care, an HOA Board member must make informed decisions, which might require a bit of research before you act or vote on an HOA matter. For example, before finning a homeowner for a rule violation, you must familiarize yourself with the association’s CC&Rs, and the details of the situation, such as by talking with the homeowner. HOA Board members must also act in a prudent and reasonable manner, basically using sound business judgment, and avoiding arbitrary or capricious actions. For example, you can’t fine a homeowner for painting his or her home red just because you don’t like that color, if this is not a violation of association rules.
THE DUTY OF LOYALTY
The duty of loyalty requires that HOA Board members act fairly, in good faith, in the interest of, and for the benefit of, the HOA as a whole, rather than make decisions based on any personal interest or gain. HOA Board members should also avoid acting where there is a conflict of interest. For example, a Board member who is helping select landscapers for the property should not steer contracts for landscaping to family members. Or a Board member who owns a purple house should not participate in a Board vote on whether or not to allow pink and purple homes in the development.
Additionally, an HOA Board member must protect members’ confidentiality, and not divulge information provided in confidence. For example, if a home owner confides in a Board member about his impending home foreclosure in order to arrange a payment plan for HOA dues, the Board member should not disclose the information to a friend or neighbor
THE DUTY TO ACT WITHIN THE SCOPE OF AUTHORITY
This duty requires the HOA Board to perform the duties it’s obligated to carry out, but prohibits the Board from making decisions or acting on matters without the authority to do so.The authority of an HOA comes from its obligations under state laws, as well as the authority granted to it in the development’s governing documents.
To ensure you meet your obligations as a Board member, you must know what duties are required. Review your state law and HOA’s governing documents, specifically the articles of incorporation and bylaws, and your development’s CC&Rs to determine the HOA’s obligations, and the extent of its authority. For example, if the laws or governing documents do not grant your HOA Board the authority to adopt new rules and regulations, any restrictions the HOA adopts about home colors might be invalid.