Board members and managers often ask us to explain the fiduciary duties of board members to the community associations that they serve. The following article is offered to help guide directors in their roles of responsibility. In advising boards, we recommend that directors try to distinguish the emotions involved in some situations from the facts and interests of the association, and to let the latter guide the decision-making process.
What is a Fiduciary
adj. of, relating to, or involving a confidence or trust: as A: held or founded in trust or confidence, B: holding in trust, C: depending on public confidence for value or currency
Fiduciary duties arise from special relationships that the law recognizes. A fiduciary relationship is one between a fiduciary and a client (beneficiary), such as doctor-patient, attorney-client, trustee-beneficiary, and board of directors-corporation. Any Board of Directors needs to remember that navigating the state and local rules and laws pertaining to Homeowners Associations should not be approached too lightly. Advice from property management, insurance, or legal professionals is typically less expensive than unforeseen consequences of seemingly harmless actions.
What duties must board members of nonprofit corporations strive to uphold?
- Duty of Care. Community association boards must give the business of their associations the same degree of care and diligence that prudent persons would exercise in their own affairs in similar circumstances. The duty of care requires directors to invest time and attention in association business, make reasonable inquiry into association matters to enable informed decision-making, and take reasonable, not arbitrary or capricious, actions.
- Duty of Loyalty. Directors of community associations, like their counterparts in for-profit corporations, have a duty to the association and its members to act for the association’s benefit only and with an eye to its best interests, without regard for any personal interest the directors may have. Courts take this duty very seriously, using expressions such as “utmost good faith.” If a transaction is challenged, courts place the burden on the director to demonstrate the fairness of any transaction in which the director is personally involved.
- Duty to Act within the Scope of Authority. Directors owe a duty to their associations and to their members to perform their duties in accordance with the authority granted to them by statute and in their governing documents. If damage results when directors have gone beyond that authority, those directors could be held personally liable for their unauthorized actions.
Does Texas law allow nonprofit corporations to protect their board members from liability if a challenge occurs?
Yes. Texas statutes offer protections to nonprofit corporation directors and officers by allowing the corporate articles of incorporation or bylaws to eliminate or limit the personal liability of a director to the nonprofit corporation or its members for monetary damages resulting from a director’s breach of fiduciary duty. Corporate protections for board members also come in the form of directors’ and officers’ liability insurance, but the best protection may be found in sound business practices.
What types of director actions may not receive protection by statute or in corporate documents?
Corporate documents cannot remove or limit the personal liability of a director for certain actions: (a) monetary damages for a breach of the director’s duty of loyalty to the nonprofit corporation or to its members; (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) unlawful distributions of the corporate assets, including loaning corporate funds to a director or officer; or (b) any transaction from which the director directly or indirectly derived an improper personal benefit.
What actions can community association boards take to limit claims that they have breached their fiduciary duties?
Here are some best practices we recommend for any board member:
- Understand the association and its operations.
- Gain a working knowledge of the association’s governing documents and their requirements for association governance.
- Seek the advice of legal and other professionals and listen to the advice those professionals give.
- Select & support professional association management.
- Maintain adequate finances, and keep the future needs in mind.
- Help all members of the Board remember that there are many laws that apply to Texas Homeowners Associations including HOA law, Corporation law, and laws concerning the collection of debts.
- Devote time to association business and actively participate in decision-making.
- Avoid making decisions solely based on popularity or a quiet dissension among neighbors.
- Serve the association altruistically, without compensation or special treatment.
- Conduct business at arm’s length and for the association members’ benefit, not your own or a single subgroup of members.
- Document the decision making in the association’s minutes, including professional advice received, for all major decisions.
There is minimal risk in serving on a community association Board if you do so in good faith and keep the three duties of a board member in mind. If you have questions concerning serving on a board of a Texas community association, please feel free to contact Allied HOA Management.
Charles Seaman is the Operations Director for Allied HOA Management. He can be reached at CharlesS@alliedmgmt.com