All About Fiduciary Duties
What is a Fiduciary Duty?
A fiduciary is a person who holds the highest relationship of trust with one or more other parties. Typically, a fiduciary is responsible for prudently taking care of money or other assets for the benefit of another person. Thus, as fiduciaries the directors of a homeowner’s association owe the members or shareholders of that corporation certain duties. The primary fiduciary duties a director owes to an association’s members are the duty of confidentiality, duty of loyalty, duty to enforce governing documents, duty of impartiality, duty to defend actions, and the duty of disclosure. The foregoing list may seem overwhelming but read on for further information on what each of these duties requires.
The Duty of Confidentiality
Board members possess the duty of confidentiality that requires the directors to keep matters pending before the Board, such as financial or legal issues, private, and to not disclose such matters to others, including unit owners who are not Board members. Similarly, directors cannot disclose such matters to Board members who have a direct conflict of interest with such matters. Directors should know that this duty applies both to current and former Board members. That is, the duty to preserve confidences continues even after a person no longer serves on the Board.
The Duty of Loyalty
Board members cannot have divided loyalties and may not take any personal action or opinion which is against or inconsistent with the best interests of the Association. Board members must place the Association’s interests before their own personal interests, including without limitation, financial interests, and before any other individual member’s interests.
The Duty to Enforce Governing Documents
The Board has a duty to enforce the Association’s governing documents, including its CC&Rs and Rules and Regulations, in good faith, and not in an arbitrary or capricious manner. Further, an Association’s enforcement procedures must be fair and applied uniformly to all members. That being said, a Board generally has the ability to weigh the gravity of a violation, the likelihood of a favorable outcome for the Association, and its expected cost when determining how rigorously to pursue a violation of the governing documents. Please note, the scope of the foregoing discretion is dependent on the particular facts of a case and should involve analysis by legal counsel for the Association.
The Duty of Impartiality
Board members must carry out their obligations in a fair and consistent manner. They may not favor or act with partiality to any owner(s). A director that has a conflict of interest in any matter pending before the Board should not take part in any discussions or decisions regarding that matter to ensure impartiality of any discussions and voting. Board members also should not circulate any written materials to members without the approval of a majority of the Board.
The Duty to Defend Actions
The inverse of the Duty to Enforce, directors have standing to defend (as well as initiate) litigation and other proceedings in the name of the Association on behalf of its members. The Board is required to defend claims brought against the Association and cannot allow a default judgment to be entered without a compelling reason. It is important to note here that if the Association is incorporated, and the corporation’s corporate status is suspended by either the Secretary of State or the Franchise Tax Board, the Association must remedy the suspension as soon as practicable so as to ensure that the Association is not prejudiced in its ability to defend or initiate litigation.
The Duty of Disclosure
While an Association is not required to disclose that it has filed litigation (except for litigation against developers for construction defect), Boards should keep its members generally informed of its activities. When a Board is providing its membership with details regarding any litigation and legal matters it is important to obtain the advice of the Association’s counsel to ensure that no information which could potentially prejudice the Association’s position in litigation or strategy is inadvertently released. There are other, statutorily required disclosures which the Board is required to make to the Association’s membership also, including those contained in the Annual Budget Report and Annual Policy Statement.