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Understanding an HOA Board's Fiduciary Duties to Homeowners

Writer's picture: Michael Zar, Esq.Michael Zar, Esq.


Homeowners Associations (HOAs) play a significant role in maintaining and managing common interest developments (CIDs) across California. These entities have governing bodies, typically an elected board of directors, that are responsible for making decisions affecting the entire community. As such, the HOA board holds significant power, but with that power comes substantial responsibility. Specifically, HOA board members owe fiduciary duties to the association and its members—namely, the homeowners. In California, these duties are outlined in the California Corporations Code, the Davis-Stirling Common Interest Development Act, and established case law.


In this post, we’ll explore the fiduciary duties of HOA board members, their obligations under California law, potential breaches, and the consequences of failing to uphold these duties.


What Are Fiduciary Duties?


A fiduciary duty is a legal obligation of one party to act in the best interest of another. In the context of HOAs, board members are fiduciaries to the association and, by extension, to the homeowners. They must act in good faith, with due care, loyalty, and in the best interest of the community they serve. Understanding the fiduciary duties of HOA board members is essential for both board members themselves and the homeowners who rely on them to manage the community effectively.


KEY FIDUCIARY DUTIES UNDER CALIFORNIA LAW


1. Duty of Care


The duty of care requires HOA board members to make informed decisions after conducting appropriate due diligence. Board members must be fully aware of the association’s affairs and take the time to research, gather information, and analyze situations before making decisions that impact the community.


In California, the Corporations Code section 7231 outlines the standard for the duty of care. It specifies that board members must act "in good faith, in a manner such director believes to be in the best interest of the corporation," and with the care "that an ordinarily prudent person in a like position would use under similar circumstances."


Key Aspects:


  • Board members should attend meetings regularly and stay informed on community issues.

  • Decision-making should be based on solid evidence and advice from experts when necessary (e.g., attorneys, accountants, or contractors).

  • Proper procedures must be followed, including consultation with professionals if needed.


Failure to adhere to this duty can expose the HOA to legal liabilities and jeopardize the wellbeing of the community.


2. Duty of Loyalty


The duty of loyalty requires board members to act in the best interest of the association and not for personal gain. This means board members must avoid conflicts of interest, self-dealing, or engaging in activities that would benefit themselves over the homeowners they serve.


A conflict of interest arises when a board member has a personal or financial stake in the outcome of a decision. For example, if a board member is also a contractor and advocates for the HOA to hire their company, this would constitute a conflict of interest unless fully disclosed and handled appropriately.


Key Aspects:


  • Full disclosure of any conflicts of interest is essential.

  • Board members must recuse themselves from votes where they have personal interests.

  • Decisions should be made transparently and with the community’s best interests in mind.


Breaching this duty can result in severe consequences, including legal action for breaches of trust or misconduct.


3. Duty of Obedience


The duty of obedience obligates board members to adhere to the association’s governing documents, including the bylaws, Covenants, Conditions, and Restrictions (CC&Rs), and any relevant state laws, particularly the Davis-Stirling Act. The board must ensure that their actions are in compliance with the rules set forth by the community's foundational documents.


Key Aspects:


  • The board must enforce the governing documents consistently and fairly across all homeowners.

  • The HOA board should not act outside the scope of authority granted to it by these documents.

  • Board members should be aware of changes in state law that may affect the association’s operations.


A failure to comply with governing documents or state laws could lead to legal disputes and financial consequences for the HOA.


Practical Application of Fiduciary Duties


HOA boards often face challenging decisions, from managing community finances to resolving disputes between homeowners. In all actions, board members must prioritize the community’s welfare and avoid actions that benefit personal interests.


Example 1: Financial Management


One of the core responsibilities of the HOA board is managing the community’s finances. This includes setting budgets, collecting dues, and managing reserve funds. Board members have a fiduciary duty to ensure the association’s finances are handled prudently, with long-term sustainability in mind.


If an HOA board fails to maintain adequate reserves for future repairs and replacements, it could be found in breach of its fiduciary duty to the homeowners. In California, the Davis-Stirling Act requires that HOA boards conduct regular reserve studies to assess the long-term financial needs of the community.


Example 2: Dispute Resolution


Another common area where fiduciary duties come into play is in resolving disputes between homeowners. The board must act impartially and fairly when enforcing the CC&Rs, avoiding favoritism or selective enforcement. For example, if a board member allows a friend in the community to violate parking rules without penalty but fines another homeowner for the same violation, this could be a breach of the duty of loyalty.


Breaches of Fiduciary Duties: Legal Consequences


A breach of fiduciary duty occurs when a board member fails to fulfill their obligations under the law, either by acting negligently, dishonestly, or in their own self-interest rather than the community's.


Potential Consequences:

  • Personal Liability: Board members can be held personally liable if they breach their fiduciary duties, especially if their actions are found to be grossly negligent or malicious. California’s Corporations Code offers some protections for directors who act in good faith and within the scope of their authority, but those protections do not extend to willful misconduct or fraud.

  • Removal from the Board: Homeowners have the power to remove board members who fail to fulfill their fiduciary duties. Under the Davis-Stirling Act, homeowners may vote to recall directors who are not performing their duties appropriately.


  • Litigation: Homeowners may also file lawsuits against the board or individual directors for breaches of fiduciary duty. Legal actions could result in damages awarded to the homeowners or orders compelling the board to take or refrain from specific actions.


Conclusion


The role of an HOA board member in California comes with substantial legal obligations. By understanding and adhering to their fiduciary duties, board members can ensure they act in the best interest of the association and its homeowners, maintain harmony within the community, and avoid legal pitfalls. For homeowners, understanding these duties allows for greater oversight and accountability, ensuring that the board serves the community fairly and effectively.


Ultimately, good governance requires board members to exercise transparency, fairness, and diligence in every decision they make, fostering a thriving, well-managed community for all.

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