Fiduciary Duties of Board Members and Community Managers Sandra L. Gottlieb, Esq.  Managing Partner, Swedelson & Gottlieb
Introduction <ul><li>Common interest developments are governed by a board of directors; officers are appointed by the boar...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Fiduciary Duty defined </li></ul><ul><li>Duty of loyalty to...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Application of the Business Judgment Rule   </li></ul><ul><...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Application of the Business Judgment Rule   </li></ul><ul><...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Sources of a Director’s Duties to Act </li></ul><ul><li>A d...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Highlights of General Director Responsibilities </li></ul><...
Fiduciary Duties and Responsibilities of Board Members <ul><li>Highlights of General Director Responsibilities </li></ul><...
Fiduciary Duties and Responsibilities of Community Managers <ul><li>Principal/Agent relationship with associations </li></...
Fiduciary Duties and Responsibilities of Community Managers <ul><li>Corporate Filing Requirements (Incorporated Associatio...
Conflicts of Interest <ul><li>Transactions between the association and a director with a  material financial interest  are...
Attorney-Client Privilege <ul><li>Protects confidential communications between a client and the client’s attorney </li></u...
Conclusion <ul><li>Each director must act:  </li></ul><ul><ul><li>In the best interests of the association;  </li></ul></u...
Conclusion <ul><li>Following is a list of general items for an association’s board members and managers to follow: </li></...
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Fiduciary Duties

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Summary fiduciary duties for California Boards of Directors and Managers of community associations

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Fiduciary Duties

  1. 1. Fiduciary Duties of Board Members and Community Managers Sandra L. Gottlieb, Esq. Managing Partner, Swedelson & Gottlieb
  2. 2. Introduction <ul><li>Common interest developments are governed by a board of directors; officers are appointed by the board of directors. </li></ul><ul><li>Boards are elected by the membership of the association, and they manage the affairs and business of the association, which is typically focused on operation and maintenance of the association’s common areas. </li></ul><ul><li>Association board members are volunteer directors, and are shielded from personal liability for their actions assuming they acted pursuant to their fiduciary duties and statutory insurance requirements. </li></ul><ul><li>Volunteer association directors have the same fiduciary duties as boards of large corporations. </li></ul><ul><li>Knowledge of fiduciary duties is critical for new board members. </li></ul>
  3. 3. Fiduciary Duties and Responsibilities of Board Members <ul><li>Fiduciary Duty defined </li></ul><ul><li>Duty of loyalty to the association and its members </li></ul><ul><li>Must act in the best interest of the corporation </li></ul><ul><li>The California Corporations Code, association governing documents and California case law establish the fiduciary duty requirements of directors of community associations. </li></ul><ul><li>The Business Judgment Rule – California Corporations Code Section 7231(a): </li></ul><ul><ul><li>“ A director shall perform the duties of a director, including 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.” </li></ul></ul>
  4. 4. Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act in the best interests of the association. </li></ul><ul><ul><li>Do not make decisions according to self-interest. </li></ul></ul><ul><ul><li>Ensure decisions do not adversely affect the association. </li></ul></ul><ul><ul><li>Do not make decisions favoring the interests of a particular group within the association. </li></ul></ul>
  5. 5. Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act only after reasonable inquiry. </li></ul><ul><ul><li>Independently investigate and evaluate facts before acting. </li></ul></ul><ul><ul><li>Consult with experts or consultants when it is prudent to do so. </li></ul></ul><ul><ul><li>A director is entitled to rely on information prepared by experts and consultants. </li></ul></ul>
  6. 6. Fiduciary Duties and Responsibilities of Board Members <ul><li>Elements of the statutory definition: </li></ul><ul><li>Act as an ordinarily prudent person in a like position would. </li></ul><ul><ul><li>Ordinary or reasonable care is the level of care which persons of ordinary prudence would use in order to avoid injury to themselves or others under similar circumstances. </li></ul></ul><ul><ul><li>A director must act in a conservative manner, minimizing risks where they can reasonably be avoided in the same manner by a reasonably “prudent” person. </li></ul></ul><ul><ul><li>The benchmarks are the basic attributes of common sense, practical wisdom and informed judgment. </li></ul></ul>
  7. 7. Fiduciary Duties and Responsibilities of Board Members <ul><li>Application of the Business Judgment Rule </li></ul><ul><li>Lamden v. La Jolla Shores Clubdominium Homeowners Association [(1999) 21 Cal. 4th 249, 269-271] </li></ul><ul><li>The court held that it will defer to a Board’s authority and presumed expertise in discretionary decisions regarding the maintenance and repair of a common interest development, provided the Board’s decisions are: </li></ul><ul><ul><li>Based upon reasonable investigation; </li></ul></ul><ul><ul><li>Made in good faith and with regard to the best interest of the association; and </li></ul></ul><ul><ul><li>Within the scope of authority given to the Board under the relevant statutes and CC&Rs. </li></ul></ul>
  8. 8. Fiduciary Duties and Responsibilities of Board Members <ul><li>Application of the Business Judgment Rule </li></ul><ul><li>Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Association [166 Cal.App.4th 82 (2008)] </li></ul><ul><ul><li>Board did not breach </li></ul></ul><ul><ul><li>Association did breach - held liable for negligence in breaching governing documents </li></ul></ul><ul><ul><li>Reaffirmed Lamden </li></ul></ul>
  9. 9. Fiduciary Duties and Responsibilities of Board Members <ul><li>Sources of a Director’s Duties to Act </li></ul><ul><li>A director’s duties are set forth in: </li></ul><ul><ul><li>The California Corporations Code; </li></ul></ul><ul><ul><li>The Davis-Stirling Common Interest Development Act </li></ul></ul><ul><ul><li>(California Civil Code §§ 1350-1378); and </li></ul></ul><ul><ul><li>An association’s governing documents </li></ul></ul><ul><ul><ul><li>Articles of Incorporation </li></ul></ul></ul><ul><ul><ul><li>Bylaws </li></ul></ul></ul><ul><ul><ul><li>Declaration / CC&Rs </li></ul></ul></ul><ul><ul><ul><li>Rules & Regulations </li></ul></ul></ul><ul><ul><ul><li>Election Rules </li></ul></ul></ul><ul><ul><ul><li>Architectural Guidelines </li></ul></ul></ul><ul><ul><ul><li>Fine Policy </li></ul></ul></ul><ul><ul><ul><li>Condominium Plan (if a condominium project) </li></ul></ul></ul>
  10. 10. Fiduciary Duties and Responsibilities of Board Members <ul><li>Highlights of General Director Responsibilities </li></ul><ul><li>  </li></ul><ul><li>The board is responsible for managing the finances of the association. </li></ul><ul><li>The board is responsible for the maintenance, repair and replacement of the association’s common area components. </li></ul><ul><li>The board is responsible for the operation and management of the common area facilities and amenities. </li></ul><ul><li>The board is responsible for enforcing the association’s governing documents, including enforcement of: </li></ul><ul><ul><li>Use restriction violations. </li></ul></ul><ul><ul><li>Delinquent assessment collection. </li></ul></ul><ul><ul><li>Architectural restrictions. </li></ul></ul><ul><li>Failure to enforce may result in waiver of enforcement or breach of the board’s fiduciary duty, but case law confirms some discretion in enforcement. </li></ul><ul><li>Disciplinary action against homeowners for violation of the governing documents. </li></ul>
  11. 11. Fiduciary Duties and Responsibilities of Board Members <ul><li>Highlights of General Director Responsibilities </li></ul><ul><li>  </li></ul><ul><li>Limit on individual owner liability </li></ul><ul><li>Limit on director liability </li></ul><ul><li>CC&R requirements and other considerations </li></ul><ul><li>Delegation of duties </li></ul><ul><li>Role of committees </li></ul><ul><li>Liability of directors regarding delegation and management </li></ul>
  12. 12. Fiduciary Duties and Responsibilities of Community Managers <ul><li>Principal/Agent relationship with associations </li></ul><ul><li>Civil Code §1363.2(f) defines “managing agent” </li></ul><ul><ul><li>A person or entity, who for compensation, or in expectation of compensation, exercises control over the assets of the association </li></ul></ul><ul><li>Civil Code §1363.2 establishes duties of the managing agent </li></ul><ul><ul><li>If funds are accepted on behalf of association, managing agent must act in the best interests of association; loyalty obligation </li></ul></ul><ul><ul><li>Must not commingle funds or engage in fraud </li></ul></ul><ul><ul><li>Association monies must be deposited into a trust account maintained by an in-state bank, savings and loan or credit union </li></ul></ul><ul><ul><li>Upon request from board, must deposit funds into an interest bearing account, subject to certain requirements </li></ul></ul><ul><ul><li>Maintain separate records for receipt and disposition of all association money </li></ul></ul><ul><li>Additional duties may exist under the management agreement. </li></ul>
  13. 13. Fiduciary Duties and Responsibilities of Community Managers <ul><li>Corporate Filing Requirements (Incorporated Associations) </li></ul><ul><li>File appropriate documents to ensure good standing of the corporation. Failure to do so could result in suspended corporate status. </li></ul><ul><ul><li>Annual Statement of Domestic Nonprofit Corporation filed with Secretary of State </li></ul></ul><ul><ul><li>Tax documents filed with Franchise Tax Board </li></ul></ul><ul><li>If corporate status is suspended, the association cannot bring litigation or defend itself in litigation. </li></ul><ul><li>Advantage of incorporation </li></ul>
  14. 14. Conflicts of Interest <ul><li>Transactions between the association and a director with a material financial interest are acceptable (neither void nor voidable) as long as the director discloses such interest and abstains from the vote. (Corp. Code §7233) </li></ul><ul><li>Transactions where the director has a vested interest in the outcome are acceptable so long as the director discloses such interest and abstains from the vote. </li></ul><ul><li>Transactions between the association and a managing agent with a material financial interest or vested interest are acceptable (neither void nor voidable) as long as the managing agent discloses such interest. </li></ul>
  15. 15. Attorney-Client Privilege <ul><li>Protects confidential communications between a client and the client’s attorney </li></ul><ul><li>Requirements for assertion of attorney-client privilege </li></ul><ul><ul><li>Individual / entity is a client or seeks to become a client </li></ul></ul><ul><ul><li>Attorney is a member of a state bar and acting as an attorney </li></ul></ul><ul><ul><li>Communication relates to information relayed from client to the attorney </li></ul></ul><ul><ul><li>Communication was made without the presence of strangers </li></ul></ul><ul><ul><li>Communication was made for the primary purpose of securing a legal opinion, legal services or assistance in a legal proceeding, and not for the purpose of committing a crime or tort </li></ul></ul><ul><ul><li>The privilege has been claimed </li></ul></ul><ul><ul><li>The privilege has not been waived </li></ul></ul><ul><li>Does not necessarily apply to board members that happen to be attorneys. </li></ul>
  16. 16. Conclusion <ul><li>Each director must act: </li></ul><ul><ul><li>In the best interests of the association; </li></ul></ul><ul><ul><li>Only after reasonable inquiry; </li></ul></ul><ul><ul><li>in the same manner as an ordinarily prudent person under similar circumstances. </li></ul></ul><ul><li>Community managers have financial and other fiduciary duties which must be followed in the same manner as a director is required to follow their fiduciary duties. </li></ul>
  17. 17. Conclusion <ul><li>Following is a list of general items for an association’s board members and managers to follow: </li></ul><ul><ul><li>Understand the association and its operations. </li></ul></ul><ul><ul><li>Devote time to association business and actively participate in decision-making. </li></ul></ul><ul><ul><li>Select and support good management procedures. </li></ul></ul><ul><ul><li>Seek the advice of professionals and listen to them. </li></ul></ul><ul><ul><li>Avoid making decisions solely based on popularity or to quiet dissension among neighbors. </li></ul></ul><ul><ul><li>Serve the association altruistically, without compensation (does not apply to managers) or special treatment. </li></ul></ul><ul><ul><li>Conduct business at arm's length and for the association's benefit, not your own. Management must conduct business at arm’s length but certainly can enter into a business relationship where they benefit. </li></ul></ul><ul><ul><li>Document the decision-making process in the association’s minutes and resolutions, including professional advice received, for all major decisions. </li></ul></ul><ul><li>It takes a focused and committed board and manager to ensure success for an association. </li></ul>

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