The directors of an association serve as fiduciaries that must act in the best interests of the association and its members as a whole:
“…it is well settled that directors of nonprofit corporations are fiduciaries.” (Raven’s Cove v. Knuppe Dev. Co. (1981) 114 Cal.App.3d 783, 799.)
“…in recognition of the increasingly important role played by private homeowners’ associations…the courts have recognized that such associations owe a fiduciary duty to their members.” (Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d. 642, 650-651.)
“Directors of nonprofit corporations such as the Association are fiduciaries who are required to exercise their powers in accordance with the duties imposed by the Corporations Code…This fiduciary relationship is governed by the statutory standard that requires directors to exercise due care and undivided loyalty for the interests of the corporation.” (Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 513.)
As fiduciaries, directors are held to a higher standard of conduct and are required to uphold two (2) primary fiduciary duties: (1) the duty of care, and (2) the duty of loyalty.
Duty of Care (Due Diligence)
The duty of care (aka “due diligence” or “duty to investigate”) generally requires directors to be diligent in performing their responsibilities as directors of the association.
“…Directors are not merely bound to be honest; they must also be diligent and careful in performing the duties they have undertaken. They cannot excuse imprudence on the ground of their ignorance or inexperience, or the honesty of their intentions; and, if they commit an error of judgment through mere recklessness, or want of ordinary prudence and skill, the corporation may hold them responsible for the consequences…” (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852.)
In satisfying a director’s duty of care, a director must (1) attend and participate in board meetings so that the director can be kept informed of association business, (2) make reasonable inquiries regarding maintenance issues, member violations, contract issues, etc., (3) make decisions on association business, and (4) ensure that adequate association records are kept. Making reasonably inquiries is also a component of the liability protection afforded to directors under the Business Judgment Rule.
Duty of Loyalty (No Self-Dealing)
The duty of loyalty requires directors to refrain from engaging in conduct that places their interests above those of the association and its membership. The duty of loyalty is implicated in situations where directors seek to use their positions to improperly derive benefits for themselves, their friends or families (i.e., through awarding a maintenance contract to a company owned or operated by a director or his/her family member):
“…the duty of undivided loyalty…applies when the board of the directors of the Association considers maintenance and repair contracts, the operating budget, creation of reserve and operating accounts, etc. Thus,…directors of an association…may not make decisions for the association that benefit their own interests at the expense of the association and its members…” (Raven’s Cove, at 799.)
A situation where a director has a conflict of interest may not necessarily expose the director to liability or constitute a breach of the director’s duty of loyalty. (See “Conflicts of Interest” and “Interested Transactions.”)
As volunteers, directors are afforded various liability protections under the law and the association’s governing documents. (See “Director & Officer Liability Protection” and “Business Judgment Rule.”) The liability protections afforded to a volunteer director may not extend to situations where the director breaches his or her fiduciary duties:
“[I]ndividuals on the board are held to a high standard of conduct, the breach of which may subject each or all of them to individual liability…” (Raven’s Cove, at 800.)
Statute of Limitations
The statute of limitations for an action against an association or a director for breach of fiduciary duties is three (3) years from the discovery of the act giving rise to the breach. (Code Civ. Pro. § 309; Smith v. Superior Court (1990) 217 Cal.App.3d 950.)
- Code of Civil Procedure Section 309. Actions Against Directors, Shareholders; Statute of Limitations
- Corporations Code Section 7233. Transactions with Interested Directors.
- Corporations Code Section 7231. Duties of Directors; Liability.
- Corporations Code Section 310. Contracts with Directors; Void or Voidable.
Related Case Law
- Palm Springs Villas II HOA v. Parth
(2016) 248 Cal.App.4th 268
[Fiduciary Duty; Business Judgment Rule] The Business Judgment Rule does not automatically shield a HOA director from liability that may result from the director’s failure to exercise reasonable diligence or failure to act within the scope of the director’s authority under the HOA’s governing documents.
- Frances T. v. Village Green Owners Association
(1986) 42 Cal.3d 490
[Board of Directors; Fiduciary Duties] Directors may be required to exercise reasonable care in protecting persons from criminal activity.
- Raven’s Cove Townhomes, Inc. v. Knuppe Development Co.
(1981) 114 Cal.App.3d 783
[Fiduciary Duties; Reserve Account] A HOA board’s failure to properly fund a reserve account constituted a breach of their fiduciary duties to the HOA and its members.
- Cohen v. Kite Hill Community Association
(1983) 142 Cal.App.3d 642
[Architectural Control; Duty to Act in Good Faith] When exercising its architectural control authority, an association owes a fiduciary duty to its members to act in good faith, and to not make decisions that are arbitrary or capricious.
“Business Judgment Rule Does Not Protect the Willfully Ignorant” – Published on HOA Lawyer Blog (08/16)