When homeowners get upset with their HOA board members, they oftentimes accuse directors and officers of violating their “fiduciary duties”. But ironically, most people can neither define “fiduciary”, nor define “fiduciary duties” when asked. So, what does “fiduciary” mean and how does it apply to board members, if at all? These are the questions this article will seek to answer.
“Fiduciary” is a Latin term, meaning “faith” and/or “trust”. The modern-day word “fiduciary” generally refers to a person who exercises power over assets of others thereby having a legal and/or ethical obligation to act in the best interests of such other person/entity and to prioritize the person’s/entity’s interests over their own.
Generally speaking, fiduciaries are expected to conduct themselves according to the specific ethical standards regardless of the circumstances.
Are Board Member Fiduciaries?
Directors/officers make day-to-day decisions concerning management and upkeep of their communities, for the primary purpose of protecting and hopefully increasing property values of homes in the association. Arguably, a person’s home is oftentimes their biggest investment and most valuable possession. Additionally, directors exercise control over their associations’ funds, which are primarily composed of assessments paid by HOA members.
Based on the above, HOA directors and officers hold in trust assets of owners in their communities and have an ethical obligation to properly care for such property. Therefore, directors and officers fall under the fiduciary umbrella.
Do Board Members Have Fiduciary Obligations?
The standards of a fiduciary are encompassed in state and federal laws, as well as by common law. Common law imposes five primary duties on fiduciaries:
- Duty of Care
(must act as ordinary prudent person) - Duty of Loyalty
(directors must place association’s interests above their own) - Duty of Obedience
(must ensure association is abiding by all governing documents and law) - Duty of Confidentiality
(must keep certain types of information confidential and not use information for their personal gain) - Duty of Prudence
(must be informed before making decisions)
In Colorado, such standards are set forth in the Colorado Revised Nonprofit Corporations Act (“Nonprofit Act”) in Article 128, Section 401, entitled “standards of conduct”.
This standards of conduct provision sets forth three requirements with respect to discharging directors’ and officers’ duties, which encompasses the above common law fiduciary duties. Specifically, the Nonprofit Act requires directors and officers to discharge their duties:
- In good faith
(encompassing the duty of loyalty, duty of obedience, and duty of confidentiality) - With the care of an ordinarily prudent person in a like position and under similar circumstances
(encompassing the duty of care and duty of prudence) - In a manner the director or officer reasonably believes to be in the best interests of the association
(encompassing the duty of loyalty and the duty of prudence)
Pursuant to the Nonprofit Act, in order to be considered a “prudent person”, the director/officer must become informed about each situation before deciding how to move forward. How does a director or officer become informed? Each situation is different.
Sometimes it means reviewing documents, other times it means retaining the services of a professional to render an opinion or recommendation. For example, if a board is faced with a question concerning possible structural issues with a building, it would not be prudent to decide on repairs until the board has consulted with an engineer or other construction professional.
The Nonprofit Act also provides incentive for directors/officers to consult with experts by protecting such individuals from liability for making wrong decisions if the decisions were made in reliance upon an expert opinion.
The Nonprofit Act further provides if directors/officers comply with all three duties, they will be protected from liability for their actions, even if they turn out to be wrong or bad for the community.
For more information concerning fiduciary obligations and board members’ duties or if you have specific questions, please contact an Altitude attorney at 303.432.9999 or at [email protected].