After one is elected to the Board, many questions start to creep into your mind and often times cause concern and sleepless nights. This is not necessary. Rest assured that voluntary service on a Board should be rewarding, meaningful and educational. You are not in this leadership role alone – you will have at least have two others on the Board and often times many more people working with as you make important community decisions.
But let’s face it – you are now on the “Board” of a valuable community, often times worth hundreds of thousands or even many millions of dollars (in property values and common area improvements) and you are now vested as a Trustee over the community.
As long as you stick with the following guidelines, you should sleep well knowing that you are protected from liability even though some decisions will be difficult.
First: put the community’s interests above your own. Avoid self-dealing transactions (don’t award a landscaping contract to your nephew). This if formally known as your “DUTY OF LOYALTY.”
Second: make informed decisions. Screen vendors, hire HOA specific attorneys, accountants and property managers as needed. You are protected if you rely on professional decisions. HOA issues are complicated. Don’t fake it, turn to professional help as needed. Make decisions in good faith with a reasonable understanding of the consequences of those decisions. This is known as your “DUTY OF CARE.”
Third, similar to #2 above, know your CCRs, Bylaws, Rules and if incorporated as non-profit corporation, your Articles of Corporation. You don’t need to memorize these documents, but you should have them in a single binder, all together, which is passed down from Board member to Board member and is added to as new rules and resolutions or amendments are adopted. Additionally, at least be aware that your community will be subject to several state and federal statutes. In short, you cannot always rely on the express terms of your CCRs or Bylaw, etc., because a statute (federal or state) may “trump” what your documents state. That is why it is critical to have a HOA Attorney on your team.
Fourth: make sure your decisions as a Board are made in a “Board Meeting.” Your Bylaws should clearly outline how your call regular and emergency Board meetings. Never represent a “position” as being from the Board unless it was properly voted on by a quorum of Board members. Remember, if you, without authority from the rest of the Board, tell someone they have bee hired to fix the rain gutters (just as an example), that innocent vendor may be able to rely on your representation and you, yourself, may be responsible for the cost of that “contract.”
Fifth: obtain Director and Officer Insurance (D&O) and property liability insurance. This critical topic will be the subject of a future entry so stay tuned, but I do not suggest that anyone serve on an HOA Board unless there is adequate D&O insurance in place. Just today, while at an HOA Law Conference in San Francisco, one of the most respected, trusted and knowledgeable HOA insurance agents told me that he thinks that more D&O claims (that is, lawsuits against Board members) were filed in 2014 that in the last 5 to 10 years combined. Insurance protects your good faith decisions.
Sixth: take minutes of Board meetings noting the decisions of the Board. We will talk about what minutes should contain in another entry, but make sure you have a written record of decisions.
PLEASE NOTE: I cannot sugar coat it – Boards get sued sometimes. This often occurs when the Board ultimately has to sue one of its members and the member then counterclaims (often times simply out of spite). HOWEVER – if you follow the above guidelines, you can avoid the personal stress of being liable for a lawsuit, you will be defended through insurance, and you will not be personally liable should the HOA do something wrong.
REMEMBER: the primary obligation of the Board (also known as the Management Committee) is to strictly follow the Articles of Incorporation, the CC&Rs, the Bylaws, and the HOA’s Rules and Regulations. In some instances, and with the advice of Counsel, there may be some discretion with respect to the level of enforcement taken against a fellow homeowner for a violation but because your duty is to enforce the “governing documents” of the HOA, there will be some tough decisions to make.
With respect to enforcement, many Board members do not realize the following: if your governing documents use words such as “may”, you have some discretion as to how you discharge your duties. Conversely, if your governing documents use the word “shall” the Board is obligated to act in a certain fashion. This is a critical distinction that many Board members overlook when reading their governing documents. It is my intent that you pay special attention to the words “may” and “shall” as you read your documents.
Also note that this discussion of obligations and duties of the Board is premised on the assumption that your Association has incorporated as non-profit homeowner’s association. There will be instances where incorporating may not be desired, and that will be the subject of a future blog entry.
YOU ARE A FIDCUARY TO YOUR MEMBERS.
A key takeaway of this entry is that Board members owe fiduciary duties to your members. The HOA is a creation of law and it alone does not take actions, its actions are taken by its Board members. Because you are acting on behalf of the others to make decisions, handle community money, and to discharge the duties set forth in the governing documents, you owe the above described “duties of loyalty and care” to your community when making decisions.
As a side note, even Board members of unincorporated associations are usually held to fiduciary standards when it comes to decisions of the Board. .
A future blog entry will discuss BUSINESS JUDGMENT RULE which is a legal doctrine that protects the Board from liability if its decisions are made in good faith and made after reasonable inquiry with information available to them.
Fiduciary duties include such obligations and tasks as maintaining the common areas, following your reserve study to a reasonable extent, making sure your monthly or annual assessments are not underfunded, and that you have a clear vision of community maintenance and management without allowing the property to fall into disrepair and without allowing owners to violate the governing documents.
Many of you will have heard the expression of “wearing several hats.” That expression is very applicable in the HOA context. When you are a Board member you put on your fiduciary hat and all of your decisions must set your personal interests aside and use your best judgment for the benefit of the community (not yourself, not your family and not your friends).
In Utah, if you are incorporated as a non-profit homeowners association and as a Board member you make decisions in good faith, with ordinary care, that a prudent person in a like position would make, and in a manner that you believe is in the HOA’s best interest, you should be shielded from liability.
YOU SHOULD ONLY REALLY BE CONCERNED if you are a Board member and are failing to discharge your duties by willful misconduct, intentional misconduct, or gross negligence.
Otherwise – enjoy the experience, surround yourself with a good HOA team and take pride in protecting a quality of life and helping maintain your members’ property values.