HOA Board Breach of Fiduciary Duty
As a homeowners association (HOA) member, you trust that the board of directors will act in your best interest and responsibly manage the community’s affairs. However, there are instances when the board may breach its fiduciary duty, leaving homeowners vulnerable to financial loss and other consequences. Understanding what constitutes a breach and knowing your rights as a homeowner can help you protect your investment.
HOA board members perform a critical function when homeowners elect them to serve. People place trust in them when they decide on board members; these positions come with great responsibility. Their decisions can impact everyone who lives and owns property in the HOA.
As the law demands, many HOA members perform their duties in good faith and with diligence. However, there are consequences for the HOA members when they either fail to properly perform their duties or place their interests ahead of the HOA. When that happens, the homeowners have legal recourse. They can even file a lawsuit against the individual board members (or against the board as a whole) when they breach the fiduciary duties they owe the homeowners.
You can file a lawsuit if you believe the HOA violated the state’s laws or fiduciary duties. First, you should contact an HOA lawyer to learn about your rights. An attorney can handle the legal landscape, assess the extent of the breach, and determine the best course of action to protect your rights. An HOA attorney can communicate with the board, and they can file the lawsuit on your behalf. You can stop illegal actions and even obtain compensation for yourself (if you have suffered damages individually) or the entire HOA.
The Responsibilities of the HOA
HOA board members perform many vital duties as part of their roles. They are responsible for the day-to-day management and upkeep of the property. They will also deal with the individual homeowners and enforce the rules of the HOA.
Most importantly, the HOA board members manage the finances for the overall HOA and make decisions about what money to spend and with whom they will contract. Board members may also propose individual rules and initiatives on which homeowners will vote at a meeting. Along the way, they should be transparent and accountable to the homeowners who trust them.
Why an HOA Board’s Actions Are Critically Important
Homeowners’ finances and property values depend on sound collective property management. The HOA board members control your land, and what they do can affect the appearance of your property and quality of life.
You also have the obligation to pay HOA dues each month. The HOA board members make decisions that affect the amount you must pay. They have the authority to propose increases that will be up for approval by the collective body of HOA members. If the HOA board members mismanage the property, the entire HOA may end up in a financial hole, and you may pay far more each month because of other people’s actions.
Mismanagement of your property can affect your ability to sell and how much money you may get. Prospective buyers do their due diligence and learn of the reputation of the HOA. They may dig into HOA finances, knowing that their costs may increase once they purchase the property, based on factors out of their control. Conversely, a well-run HOA can result in a better place to live and more attractive options if and when you try to sell your property. Thus, you are placing significant trust in the HOA board members when you elect them to serve in their positions.
What Is a Fiduciary Duty?
The law of agency imposes special obligations on those in a position of trust who must act on behalf of someone else. The law recognizes that one may be in a weaker position when they are relying on someone else to act for them. Thus, there are special rules that apply to protect those who are in a weaker position. For example, the following people are fiduciary in other contexts:
- Attorneys
- Money managers
- Trustees
- Real estate agents
Fiduciary duties come from several sources, and general principles apply based on the nature of the relationship. In the HOA context, state law governs the board’s actions, and it must follow many obligations. HOA board members must adhere to these requirements when performing their responsibilities.
In addition, the governing documents contain requirements for the HOA board to follow. Each HOA must have bylaws covering the board’s duties, and the board members must follow them to the letter. If not, their actions are invalid, and they may even be liable.
Why Is an HOA Board Member a Fiduciary?
HOA board members are elected to serve the community’s residents, who trust and rely on these board members to fulfill these responsibilities effectively. Once the homeowners elect the board members, they delegate specific duties to them and surrender a certain amount of control. They do not get to make the decisions unless some issues are put up for a vote, as state law requires.
It does not matter that an HOA board member does not receive any payment for the job. The fact that an HOA board member has the confidence of the association members to designate them for the job is enough to impose fiduciary duties on them.
What Is the Scope of a Board Member’s Fiduciary Duty?
Board members must adhere to three primary elements of fiduciary duty in their work for the HOA. They are:
- The duty of loyalty—HOA board members must be primarily loyal to the association. They should not engage in transactions with a conflict of interest, such as using a related entity (for example, obtaining grass-cutting and landscaping services from a business an individual board member owns). If there are any potential conflicts, board members should disclose them to the homeowners, who can decide whether to approve the transaction.
- The duty of care: HOA board members must use the appropriate level of care and diligence in executing their duties. In other words, they cannot be negligent and should pay close attention when acting on behalf of the HOA. If the board fails to address an individual hazard, it violates the duty of care.
- The duty of good faith: HOA board members must act in good faith when performing their duties. They must act with honesty, fairness, and integrity when acting on behalf of the HOA.
Board members may also have the duty to disclose certain information to the homeowners, although state law governs this as it applies to HOAs. At a minimum, homeowners should be aware of contracts and certain financial information since they have a definite stake.
Regarding the duty of care, there is a rule that acts as a safe haven for board members. The business judgment rule applies to decisions they may make, and the court may not find that an HOA board member failed to uphold the duty of care if they disagree with a policy. HOA board members can legitimately exercise their judgment, even if their decision seems unwise. They are only liable if they fail to follow the governing documents, violate statutory requirements, or do something that serves no valid corporate purpose. The business judgment rules act as a safety net for board members. However, it may be possible to penetrate it in a lawsuit, depending on what the board members did and the surrounding circumstances.
One of the potential risks for an HOA board member is that they can be personally liable for a breach of fiduciary duty. In other words, the money could come out of their pocket to pay you damages, which is one reason why some people may hesitate to serve in this capacity.
Sometimes, the HOA will purchase directors and officers (D&O) liability insurance to cover board members from these lawsuits. However, the result is the same: someone must pay when a board member has breached their fiduciary duty.
Avoiding Breaches of Fiduciary Duty
HOA board members need to know their responsibilities and obligations. They also must understand the concept of fiduciary duties and what they entail. Preferably, an HOA board should train new members in their fiduciary duties and how to enforce them. The concept of fiduciary duties should not surprise HOA board members if they ever face accusations of violating them. An HOA board should retain legal counsel on an ongoing basis and ask questions if it has any doubts about the legality of its course of action.
How to Spot a Breach of Fiduciary Duty
A breach of fiduciary duty occurs when the HOA board fails to prioritize homeowners’ interests. These breaches can take various forms, such as misappropriating funds, engaging in self-dealing, neglecting necessary maintenance and repairs, or failing to enforce the governing documents consistently. These actions can have severe financial ramifications for homeowners and weaken the overall value and appeal of the community.
Homeowners need to be vigilant to spot signs of a fiduciary duty breach and prepare to take legal action on behalf of the HOA. They must closely monitor the HOA’s financial statements and decisions to determine whether an HOA board member has done something wrong. When in doubt, they can consult with an HOA attorney to review specific actions to decide whether there is a potential lawsuit.
Some signs of a breach of HOA fiduciary duty include:
- Discrepancies in the HOA’s financial statements and unexplained transactions
- The failure to maintain upkeep in the community
- Being shut out of board meetings or being kept in the dark about an HOA’s deliberations and decision-making process
- Board members showing favoritism, both to particular residents or vendors who provide services
- Evidence that board members may be personally profiting from certain transactions
What to Do When You Learn of a Breach of Fiduciary Duty
When you have questions about their management or decisions, raising your concerns with the HOA is best. Sometimes, when the HOA board members know that homeowners are watching, it may cause them to correct course and change their actions. However, they may be unable to undo improper transactions that they have already done. Still, you can resolve any disputes informally without filing a lawsuit. You can even file a complaint with the state or try to mediate any dispute before you initiate a lawsuit.
You should consult an HOA lawyer to learn more about the individual transactions and their meaning. They can answer any questions and advise you of your rights. Sometimes, you may disagree with what an HOA has done, but their actions may not rise to the level of a breach of fiduciary duty. The law treats these breaches seriously under the law, and not everything breaches fiduciary duty.
If your HOA attorney thinks that the board has committed a breach of fiduciary duty, you can and should take legal action. After all, the HOA board’s actions can affect your property’s value and finances. You may have to pay for wrongful actions personally in the form of increased dues or a lower sale price on your property when you try to sell. Your HOA lawyer can file an action on behalf of you and the other homeowners, and you can seek financial damages on behalf of either yourself or the HOA. You can also obtain an injunction to stop illegal transactions violating your homeowner rights.
In cases of misappropriation of funds or self-dealing, an attorney can investigate the situation, gather evidence, and pursue legal action if necessary. They can also assist in holding the board accountable and demanding complete and transparent financial reporting. Additionally, an attorney can help homeowners advocate for essential repairs and maintenance to protect property value and ensure a safe living environment.
A HOA Lawyer is Standing By
Remember, as a homeowner, you have rights, and the board of directors has a duty to act in your best interest. Consulting with an attorney with experience in HOA law can provide you with the necessary guidance and experience to protect your investment and hold the board accountable for any breaches of fiduciary duty.