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Legal Responsibilities of Association Board Members & Their Potential Liability

| Oct 9, 2013 | Homeowners' Associations |

Board Members of community Associations, just like corporate directors, are held to a legal standard of care in their conduct and decisions while serving on the Board. This standard of care applies in relation to the Association Members whom they represent. You will sometimes hear this standard described as a “fiduciary duty” (1). That description, while perhaps useful in certain contexts, is not technically correct when referring to most condominium and all non-condominium Associations.

Condominium (“COA”) Association Board Members: In 1992 the Washington State Legislature adopted a statute (RCW 64.34.308) that more clearly defined the standard of care legally required of a COA Board Member. That statute states the following:

(1) Except as provided in the declaration, the bylaws, subsection (2) of this section, or other provisions of this chapter, the board of directors shall act in all instances on behalf of the association. In the performance of their duties, the officers and Members of the board of directors are required to exercise: (a) If appointed by the declarant, the care required of fiduciaries of the unit owners; or (b) if elected by the unit owners, ordinary and reasonable care.

Thus, the initial COA Board Members, who are appointed by the original Declarant, are held to a true “fiduciary” standard, while subsequent COA Board Members are held to a somewhat less stringent “ordinary and reasonable care” standard. In addition, Board Members must exercise “good faith” (2) in carrying out their Board duties.

As the statute points out, there are some decision and actions that the Board cannot take when prohibited or regulated by either (1) other statutory provisions or (2) the condominium governing documents regardless of the standard of care exercised.

Non-Condominium (“HOA”) Association Board Members: In 1995 the Washington State Legislature adopted a statute (RCW 64.38.025) that again more clearly defined the standard of care legally required of an HOA Board Member. That statute states the following:

(1) Except as provided in the association’s governing documents or this chapter,
the board of directors shall act in all instances on behalf of the association. In the
performance of their duties, the officers and Members of the board of directors
shall exercise the degree of care and loyalty required of an officer or director of
a corporation organized under chapter 24.03 RCW.

This corporate standard care (3) referred to in the statute above is set forth in RCW 24.03.127 as follows:

A director shall perform the duties of a director, including the duties as a Member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances…

Thus, a Board Member for an HOA must act and make decisions while serving on the Board that are represent “good faith”, serve the “best interests of the [community]” and are reasonable under the circumstances. Such decisions and actions must also reflect a “reasonable inquiry” by the Board Member regarding underlying facts and circumstances.

As noted above with respect to COA Boards, there again are some decision and actions that the HOA Board cannot take when prohibited or regulated by either (1) other statutory provisions or (2) the community’s governing documents regardless of the standard of care exercised.

Potential Liability Of Board Members. So long as Board Members complies with these standards they are protected individually (and the Association itself is also protected) from potential claims. Moreover, such compliance will best insure fair and equitable governance by the Board. Failure to comply with this standard invites legal claims, exposes the Association and individual Board Members to liability and results in poor and unpopular governance of the Association.

In this regard, if the Association or individual Members/Owners are harmed by a breach of this duty standard by the Board or individual Board Members, there are legal remedies available to the Association and individual Association Members who are harmed.

This legal standard of conduct for Board Members arises out of the position of power and authority enjoyed by Board Members and the relationship of trust and confidence that they must have with the Association Members as a community. To fulfill this duty, Board Members must act in the interests of the members of the community as a whole avoiding any self-dealing transactions (in which a Board Member personally profits or uniquely benefits) and not making decisions that place a Board Member’s individual interests above those of the Association Members as a whole. Board Members are required by law to act in the best interests of the Association and not to exploit their position of power for personal gain or advantage.

Under circumstances where Board Members have the responsibility to enforce the governing documents, make funding decisions for the Association and at times take legal action to enforce the rights of the Association and its Members, they will often find themselves in positions of controversy and subject to criticism. Association Members who volunteer to serve on the Board through election or appointment are usually unprepared for various emotionally-charged controversies that can easily arise in the performance of their duties. A desire to avoid such controversies and criticism discourages many Association Boards from taking difficult, but necessary, action or tackling tough issues that are important to the long-term wellbeing of the Association and its community.

Nevertheless, Board Members have a legal and civic responsibility, having agreed to serve on the governing body of the Association, to take such actions and make such decisions as will best serve the interests of the community, subject to state law and the requirements and limitations of the governing documents of course. They must do so in good faith and without regard to the criticism they may face from some Association Members. That is what it means to serve on an Association Board.

A powerful illustration of the dire consequences that can result when a Board fails to live up to its legal standard of care is found in the Washington Supreme Court case of Riss v. Angel, 131 Wn.2d 612 (1997). This case involved a dispute between an individual Association Member who wished to construct a home on a lot in the community and the Association Board (as well as other Members of the community) who had opposed and rejected the new home plans. The Supreme Court ruled that the Association Member was permitted to build the home in accordance with the plan (with only some minor modifications) and, significantly, awarded a judgment against the Board Members (and a few others) who had rejected the building plan for damages and attorney’s fees totaling over $200,000.00.

The Riss case sends a grim warning to Association Boards to take their legal responsibilities very seriously:

“Directors have a fiduciary duty to exercise ordinary care in performing their duties and to act reasonably and in good faith.”

The Riss Court ruled that the Board had not thoroughly investigated the appropriateness of the proposed home under the covenants, had used faulty information to justify its decision and had communicated misleading/false information to the community Members in support of the Board’s decision.

While Riss was decided based upon events that preceded the adoption of the 1995 statutory standard of care for HOA Boards discussed above, its decision and analysis would very likely be the same under the statutory standard.

The lesson to be learned from the Riss and other Washington cases is that Board Members should act and make decisions only after appropriate inquiry/investigation, that decisions must be “reasonable” in context and must not improperly advance the interests of individual Board Members to the detriment of other community Members or the community as a whole.

If you have questions about decisions made or now being faces by your Association Board, we can help. Do not hesitate to call on us for legal advice and assistance.

1 Washington appellate court decisions have at times used the “fiduciary duty” terminology. See Riss v. Angel, 131 Wn.2d 612, 632 (1997) and Schwartzmann v. Association Of Apartment Owners, 33 Wn.App. 397, 403 (1982)
2 Schwartzmann v. Association Of Apartment Owners, 33 Wn.App. 397, 403 (1982)
3 Corporate Officers/Directors have fiduciary duty of undivided loyalty & care & good faith per Lodis v. Corbis Holdings, 172 Wn.App. 835, 860 (2013), but this description of their duty is based on the Business Corporations Act & RCW 23B.08.420 and thus is not directly applicable to HOAs per RCW 24.03.127