In the HOA industry, we frequently hear certain words tossed around when it comes to board duties. We hear words such as “fiduciary”, “duty”, and “obligations”. But rarely does anyone actually reference a specific statute or specific language in a statute addressing board duties.
The truth of the matter is that such a statutory provision does exist. It’s cleverly hidden in the Colorado Revised Nonprofit Corporations Act in Article 128, Section 401, but it’s definitely there. This standard of conduct provision applies to directors and officers of an association and sets forth three requirements to be used when discharging a director’s or officer’s duties. Specifically, the statute provides that when officers or directors of an association discharge their duties, they must do so:
- In good faith;
- With the care of an ordinarily prudent person in a like position and under similar circumstances; and
- In a manner the director or officer reasonably believes to be in the best interests of the association.
Clear as mud? Just in case it isn’t completely clear, let’s review each one separately.
A legal dictionary defines “good faith” as an “honest and sincere intention to fulfill one’s obligations.” What does this mean? It means board members and officers must base their actions and decisions on what they sincerely believe will help the association. Making decisions and taking actions based on hidden agendas to benefit the director/officer or such individual’s friends or neighbors in a community is most definitely not in good faith.
Additionally, Section 401 of the statute provides that directors/officers are not acting in good faith if such individual relies on an opinion when he/she knows the person who issued the opinion is likely incorrect. In other words, using expert opinions or other documentation to persuade the board to vote in a certain way, while knowing that such opinion or documentation should not be relied upon, is also a breach of such director/officer’s duty of good faith.
Ordinary Prudent Person
An “ordinary prudent person” is a legal term of art, but is generally meant to encompass the average person. However, the term “prudent” also means that such average person is informed about the pertinent situation. Therefore, in order to comply with this particular standard of conduct, a board member/officer must become informed with respect to a particular situation before he/she acts.
How does one 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 make a decision until the board has consulted with an engineer or other construction professional as to the situation.
The statute also provides incentive for directors/officers to consult with experts by protecting such individuals from liability for making wrong decisions if such decisions were made in reliance upon an expert opinion. So it definitely pays to get informed!
Best Interests of the Association
This requirement essentially means that decisions must be made to benefit the entire community and not simply one or a few owners. Oftentimes, boards get hounded by a loud minority wanting a change, but the vast majority of owners who are happy and quiet might not benefit by such a change. In this case, making the demanded change might be a breach of this duty because it would not benefit the entire community, but would only benefit the few loud owners.
This does not mean if a board makes a decision that later turns out to hurt the community, it has necessarily violated this duty. As long as a director/officer truly believes that the proposed action will be in the best interests of the community, he/she has not violated this requirement.
For more information concerning board members’ duties or if you have specific questions, please contact one of our attorneys at 303.432.9999.