WHAT DID I JUST SIGN UP FOR?

Fulfilling Your Fiduciary Duties As A Board Member

BY: TIM FLANAGAN, ESQ.

Board members often do not realize the seriousness of their position as volunteers for their community association. Although they are not receiving compensation for their time, and their meetings may be informal, board members are responsible for large sums of money and millions of dollars of property value for the other members of the community association. Thus, board members owe important fiduciaries duties to their community association.

WHAT IS A FIDUCIARY DUTY?

A fiduciary duty is the highest level of duty under law; it is very similar to the duty a trustee owes to a trust. It is a common law concept derived from England and is a legal tradition passed down for centuries.

WHAT HAPPENS IF YOU NEGLECT YOUR FIDUCIARY DUTIES?

A board member could be personally liable for breaching their fiduciary duties to the association. However, a board member who exercises the business judgment rule in making their decisions will be protected from liability. Therefore, board members must act in good faith, and in a manner they believe to be in the best interest of the association, not arbitrarily or capriciously, with reasonable reliance on the advice of experts. (Corporations Code Section 7231.)

DUTY OF DILIGENCE/DUE CARE

The most basic fiduciary duty is to act with due care. Acting with due care means that each board member should take all the necessary steps to make sure that they are making the best decision for the community association. Some of these steps are obvious, such as regularly attending meetings and coming prepared for the board meetings. If a board member has not even reviewed the board packet before the meeting, then they are not prepared and not acting with due care.

If a board member has more questions about a particular decision before the board, or wants more information, then the board member has an obligation to make those inquiries. When seeking answers to these questions, the board should use vendors who have experience with the issues before the board. For example, if the board is concerned about a parking lot repaving job, then they should ask an asphalt vendor for their input and recommendations.

When making decisions for the community association, a board is not acting with due care by “polling” the community or asking for the members’ input because it is the board who is tasked with the responsibility to make those decisions, and they cannot delegate this responsibility. Further, this strategy never works as intended since only a small number of owners will respond to such a “poll” or survey.

DUTY OF LOYALTY

The duty of loyalty means that the board members need to make decisions that are in the best interest of the association, even if that decision is not in the board members’ personal interest or that of their friends. Board members must put the community’s needs ahead of their own personal needs. For example, the board should raise assessments if it is necessary to keep up with raising costs, inflation, and to comply with reserve study plans, even if the board members cannot individually afford an increase. The short-term pain of paying increased assessments needs to be weighed against the long-term benefits to the community.

Similarly, if a board member votes against an action item approved by the board, that board member has a duty to support that decision and not attempt to derail it. Often, board members will talk badly about a decision they didn’t support, even posting negative information and opinions on social media. Those actions only serve to divide the community and harm the association, and thus should be avoided. Remember to always act professionally and treat your job as a business to avoid hurt feelings and emotional actions.

DUTY OF CONFIDENTIALITY

A board member is a unique position in the community in that they are privy to confidential and private information about their neighbors. It may be hard not to gossip or share that information with your family or friends. However, the duty of confidentiality requires board members to protect all confidential and private information they gather while sitting on the board. This duty transcends even after the board member is no longer serving on the board.

Therefore, board members must avoid discussing ongoing violations or enforcement actions against fellow homeowners. Board members also should not copy, reproduce, circulate or share any written board information/communication with non-board members. This is especially true if the intent of circulating the information is to embarrass and owner or to deride the board itself.

Similarly, board members may not circulate any written materials, information, documents, including posting about pending board matters, to other homeowners without the full board’s prior knowledge and approval. This will avoid the spreading of confidential information, or even misinformation to the community, and it will protect the board members from individual liability.

CONCLUSION

Serving on the board of directors can be a thankless job, but it is a very important one where millions of dollars are at stake, as well as the property values of your neighbors. Fiduciary duties are a reminder of how important your role is to the community association. However, the significance of these duties should not discourage you from serving on the board. If you exercise good business judgment by 1) making decisions in the best interest of the community association as a whole; 2) avoiding arbitrary decisions that have no rational basis; and 3) relying on expert opinions to inform your choices, then have fulfilled your fiduciary duties. And thanks for serving on your board!

Tim Flanagan is the Founder and Managing Partner of Flanagan Law APC. He can be reached at tim@ flanaganhoalaw.com.