When it comes to director duties and obligations, people throw around lots of terms, such as “fiduciary”, “duty”, and “best interests”. But rarely does anyone 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 when it comes to discharging directors’ or officers’ duties. Specifically, the statute requires officers or directors to discharge their duties:
- 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.
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 such director/officer 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 a structural engineer or other construction professional as to the situation.
The Nonprofit Act provides directors/officers with an incentive when it comes to getting informed. The Nonprofit Act specifically states that directors/officers who rely on the opinions of experts will not be liable for such decisions . . . even if the decisions are wrong! Therefore, it behooves all board members and officers to obtain exerts when it comes to making difficult or technical decisions.
However, the Nonprofit Act also provides that directors/officers cannot rely on opinions they know are either incorrect or likely to be incorrect. In other words, don’t retain people who are not true experts in a field as a way to save money or to allow the president’s out of work brother to get a paying gig. These choices will not serve the board well and will expose the Association and individual directors and officers to liability.
Best Interests of 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 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 or [email protected].