Owner Association Board Member Duties and Liabilities—part 2
| Publication year | 2021 |
| Pages | 32 |
CONSTRUCTION LAW
BY RONALD M. SANDGRUND, JOSEPH F. (TRIP) NISTICO III, AND JERRY ORTEN
This three-part article examines the relationships among developers, owner association board members, owner associations, and owner association unit owner members.
This part 2 focuses on association board members' potential conflicts of interest and ways to manage and mitigate those conflicts.
In common interest communities[1] subject to Colorado's Common Interest Ownership Act (CCIOA), all owner association (association) board members owe legal duties to both the association and its owner-members (owners).[2] Courts carefully examine the conduct of association board members appointed by the community's developer while the developer controls the board (declarant control period)[3] because conflicts of interest may exist between the developer and its appointed board members and the association and its current and future owners.
This three-part article examines case law and articles addressing the relationships among developers, developer-appointed board members, owner-elected board members, associations, and owners generated during the nearly 20 years since publication of an earlier Colorado Lawyer article on this topic.[4] Part 1 examined association board members' legal duties and potential liabilities, including how courts treat developer-appointed board members who serve during the declarant control period.
This part 2 examines board member conflicts of interest that may arise during the declarant control period. These conflicts of interest may involve reasonably investigating conditions that could reveal defective construction, or learning of defective construction within the community; timely pursuing claims arising from defects; providing adequate management, maintenance, and repairs; setting reasonable assessments; maintaining reasonable financial reserves; making adequate and complete disclosures regarding the community's physical and financial condition; and reasonably enforcing the community's restrictive covenants and any community rules and regulations.
Potential Claims against Developer-Appointed Board Members
Various legal and equitable claims against developer-appointed board members may arise during the declarant control period. Courts generally recognize the "inherent conflict that a developer faces in promoting and marketing property for a profit, while simultaneously ensuring the interests of a homeowners association (HOA) and its members."[5] As described below, these claims often arise from board members' failure to recognize that their primary loyalty must be to the community association and the owners, not the developer who appointed them and who typically employs them. See the accompanying sidebar for additional resources on this topic.
Board members must remain cognizant of the serious, recurring conflicts of interest that can arise during the declarant control period and avoid violating their fiduciary duties. Some developers may view these potential conflicts and ensuing liabilities as hindrances to completing community development and construction in a timely and cost-beneficial manner. But changing this liability scheme would be a matter for the legislature.
UCIOA and Restatement Guidance
In addition to the cases discussed below, the Uniform Common Interest Ownership Act (UCIOA) and its comments help Colorado courts construe CCIOA.[6] The Restatement (Third) of Property (Servitudes) (Restatement) has also influenced how some courts analyze developer and board member conduct.[7] The Restatement draws its summary of duties and liabilities from the extensive body of judicial opinions on the subject. Both UCIOA and the Restatement emphasize the fiduciary duties developers and their appointed board members owe associations and their owners.
For example, Restatement % 6.20 provides that until the developer relinquishes control, it owes the association and its members the duties to:
■ use reasonable care and prudence in managing and maintaining the common property;
■ establish a sound fiscal basis for the association by imposing and collecting assessments and establishing reserves
RESOURCES EXAMINING CLAIMS AGAINST DEVELOPER-APPOINTED BOARD MEMBERS
■ 2A Bruner and O'Connor, Bruner & O'Connor on Construction Law § 7:29.50, Project Risks—Planning and Selection Risks—Condominium or Multi-Family Housing Developments (West Supp. 2020)
■ Levin, "Condo Developers and Fiduciary Duties: An Unlikely Pairing?," 24 Loy. Consumer L. Rev. 197 (2011)
■ Leder, "Maximizing Values and Minimizing Liabilities in a Failed Phased Community," 38 Colo. Law. 89 (July 2009)
■ Zuckerman, "Using Good Judicial Judgment: Dispensing with the Business Judgment Rule in Mixed-Use Community Association Disputes," 81 Temple L. Rev. 927 (Fall 2008)
■ Kennedy, "Discovery of Construction Defects in Planned Unit Developments: The Role of the Homeowners Association," Am. Bar Ass'n Forum on the Construction Industry at 3 (Apr. 7-9, 2005)
■ Estis, "Risk Management in Condominium Development: The Developer's Perspective," Am. Bar Ass'n Forum on the Construction Industry (Apr. 7-9, 2005)
■ Kennedy and Hirsch de Haan, "Litigation Involving the Developer, Homeowners' Associations, and Lenders," 39 Real Prop. Prob. & Tr JA (Spring 2004)
■ Pardon, "Advising Developers in Operating Community Associations," 77 Wis. Lawyer M, 14 (Mar. 2004)
■ Sandgrund and Smith, "When the Developer Controls the Homeowner Association Board: The Benevolent Dictator?," 31 Colo. Law. 91 (Jan. 2002)
■ McNulty, "The Case Against Strict Enforcement of Statutes of Limitations in Community Association Latent Construction Defect Actions," 3 CAI J. Cmty Ass'ns L. 1 (2000)
■ Hyatt, Condominium and Homeowner Association Practice: Community Association Law (ALI-ABA 3d ed. 2000)
■ Brenner, "Consider Conflicts of Interest Before Representing a Developer and Community Association," 3 CAI J. Cmty. Ass'ns L. 2 (2000)
■ Boken, "Developer's Fiduciary Duty to Condominium Associations," 45 S.C L. Rev. 195 (Autumn 1993)
■ Hyatt and Stubblefield, "The Identity Crisis of Community Associations: In Search of the Appropriate Analogy," 27 Real. Prop. Prob. & Tr. J. 589 (Winter 1993)
■ Natelson, Law of Property Owners Associations (Little Brown & Co. 1989)
■ Hyatt and Rhoads, "Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations," 12 Wake Forest L Rev. 915 (Winter 1976)
■ Shipley, "Self-Dealing by Developers of Condominium Project as Affecting Contracts or Leases with Condominium Association," 73 A.L.R. 3d 613 (1976) for the maintenance and replacement of common property;
■ disclose the amount by which the developer is providing or subsidizing services that the association is or will be obligated to provide;
■ maintain records and account for the financial affairs of the association from its inception;
■ comply with and enforce the terms of the governing documents, including design controls, land-use restrictions, and payment of assessments;
■ disclose all material facts and circumstances affecting the condition of the association-maintained property; and
■ disclose all material facts and circumstances affecting the association's financial condition, including the developer's and the developer's affiliates' interests in any contract, lease, or other agreement entered into by the association.[8]
Both developer-appointed and owner-elected board members generally assume these same duties, and as discussed in part 3, developers may become liable for an appointed board member's breach of these duties. The following discussion addresses recurring liability exposures that arise during the declarant control period.
Failure to Investigate, Disclose, or Timely Pursue Potential Construction Defect Claims
Developers and developer-appointed board members may bear liability for failing to investigate and repair common element and certain individual unit/home defects and related damage. As one commentator explained, "To the extent that a declarant-developer fails to timely investigate, or fails to timely pursue viable claims against those responsible for... construction defects, liability may attach for its breach of fiduciary duty and negligence."[9] As discussed below, several cases from other states have addressed a developer's and its appointed board members' liabilities for failing to investigate potential defects and pursue claims for known defects.
Associations may pursue nondisclosure or concealment claims against developers a nd their appointed board members based on the developer-controlled board's alleged failure to disclose construction defects to the owner-elected board before or upon the developer turning control over to that board. These claims may include allegations that the board—with a majority of its members elected by owners other than the developer—may have delayed, qualified, or refused board control and/or some or all of the association's financial responsibilities or liabilities but for the failure to disclose.[10]
Colorado. No published Colorado decision has addressed developer-appointed board members' failure to (1) seek relief against the developer for construction defects known or manifested during the declarant control period, or (2) investigate or disclose knowledge of the existence of such defects to the owner-elected board members before or upon turnover.[11] But in a 2012 Douglas County case, the jury awarded plaintiffs $18.2 million based not only on the developer-appointed board's failure to take remedial action against the developer, but also on its failure to disclose to the community's homeowners the existence of known latent defects.[12]
CCIO A genera...
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