Construction Law, 0921 COBJ, Vol. 50, No. 8 Pg. 30
| Author | BY RONALD M. SANDGRUND, JOSEPH F. (TRIP) NISTICO III, AND JERRY ORTEN |
| Position | Vol. 50, 8 [Page 30] |
August, 2021
Owner Association Board Member Duties and Liabilities PART 3
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 unit owners. This part 3 focuses on developers' potential liability for their own and their appointed association board members' misconduct, and proactive and mitigative measures available to limit developer-appointed and owner-elected board members' liability exposure.
In common interest communities1 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 die conduct of association board members that die community's developer appoints while the developer controls die board (declarant control period)3 because conflicts of interest may exist between die 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 die relationships among developers, developer-appointed board members, owner-elected board members, associations, and owners that have been generated during die nearly 20 years since publication of an earlier Colorado Lawyer article on this topic.4 Part 1 examined owner association board members' legal duties and potential liabilities, including how courts treat developer-appointed board members who serve during the declarant control period. Part 2 examined how courts have treated recurring board member conflicts of interest that may arise during the declarant control period.
This part 3 examines a developer's potential liability for its appointed board members' wrongful conduct. It explains how developers and appointed board members might carefully monitor and manage die community's development to recognize and address typical conflicts of interest. It also explores how to mitigate or limit board members' liability exposures through insurance and indemnity.
Developers' Roles and Responsibilities
A developer may wear many different hats, often simultaneously, while developing a community.5 Initially, under CCIOA, the developer acts as "declarant," which is defined as "any person or group of persons acting in concert who: (a) As part of a common promotional plan, offers to dispose of to a purchaser such declarant's interest in a unit not previously disposed of to a purchaser; or (b) Reserves or succeeds to any special declarant right."6
The developer or its agent may create or promote the association or other entity created pursuant to CCIOA to manage the community's affairs.7 The developer or affiliated entities may directly, or collaboratively with one or more other construction professionals, also provide design, construction, supervisory, inspection, and/or other services necessary for die planning, development, and construction of die community's real property improvements.[8] In conjunction with this development and construction, the developer may market and sell the units directly or through an affiliate or agent. The developer may also maintain and repair community improvements, either directly or through affiliated entities or agents. Further, a developer-controlled board may cause the association to contract with a third-party management company or agent to assist in association governance and operations, or the developer's staff may perform these services. The developer may also own, occupy, or use homes as display models or for other purposes, and qualify as an owner. Sometimes developer-appointed board members own units as well.
The developer typically controls the board during die initial build out and sales phase.9 The developer also usually appoints some or all of die initial board members, or effectively controls their actions, during the declarant control period.10As a practical matter, the developer often appoints board members who are its own employees or representatives and who were involved in the community's development, construction, and/or unit sales. However, the developer may also relinquish control over the board pursuant to CCIOA.11
A developer's disparate roles as promoter, developer, builder, marketer, vendor, manager, maintainer, appoint or of directors, and owner implicate potential legal duties and liabilities. These varying roles also present opportunities to mitigate these risks.
Potential Liability of Developers Who Appoint Board Members
A developer's liability may attach directly to the developer for its own wrongful conduct. Liability may also be imputed to die developer for its appointed board members' wrongful conduct under various legal theories, including vicarious liability, statutory joint liability, and civil conspiracy liability.
Direct and Vicarious/Imputed Liability
In one unpublished case, Countryside Community Ass'n v. Pulte Home Corp., a developer conceded that its employees who were serving as developer-appointed board members owed fiduciary duties to die owners,[12] yet it maintained that developers themselves do not owe such a duty and could not be held liable for its employees' violations of such duties. However, die Colorado Court of Appeals found "nothing to suggest that [CCIOA] section 303(2)(a) eliminated the doctrine of respondeat superior in this context"13 and found die developer vicariously liable for its appointed board members' tortious conduct.[14
Outside Colorado, several courts have imposed liability on developers and their appointed board members for acting against an association's interests during the declarant control period. The California Court of Appeal observed that, where a developer dominates t he association, fiduciary duty principles support holding "those exercising actual control over the group's affairs to a duty not to use their power in such a way as to harm unnecessarily a substantial interest of a dominated faction."15 The court also imposed liability on a developer for its appointed board members' "failure to... exercise supervision which permits mismanagement or non-management... "[16]
The Superior Court of Connecticut similarly held that a developer with the power to control the association's board members had a fiduciary duty to disclose roof defects to die association.17 The court also held that the homeowners' allegations that the builder conspired with the developer to conceal roof defects—a violation of the developer's fiduciary duty to the association—were legally sufficient to present a claim for relief against the builder, even though the association did not allege that the builder was itself in a fiduciary relationship with the association.18
Statutory Joint ("Actingin Concert") Liability
CRS § 13-21-111.5(4) provides that "[j]oint liability shall be imposed on two or more persons who consciously conspire and deliberately pursue a common plan or design to commit a tortious act." This statute has been construed to impose joint and several liability on two or more defendants under broader circumstances than where defendants engage in a civil conspiracy.[19and it preserves common law acting-in-concert joint and several liability despite Colorado's adoption of the pro rata liability statute.20
In Resolution Trust Corp. v. Heiserman, the Colorado Supreme Court held that if two persons expressly or impliedly agree on a course of conduct, they are jointly liable for any damages flowing from conduct that results in a tortious act.21Heiserman further held that two or more tortfeasors may be jointly liable for their negligence or breach of fiduciary duty where an express or implied plan or design to act or refrain from acting results in injury to another, even if they did not intend to act tortiously.22Thus, joint liability under CRS § 13-21-111.5(4) can be based on wrongful conduct, including breaches of fiduciary duties, where two tortfeasors simply agree to pursue a common plan or design.
While an employer and employee generally may not engage in a civil conspiracy when the employee acts on the employer's behalf, Colorado courts have not yet addressed whether this rule applies to developers' and developer-appointed board members' acting-in-concert liability.[23]As explained in the following section, there are several reasons the general rule may not apply in this particular context. If this general rule limiting liability does not apply, developers and their appointed board members may be jointly liable for their tortious conduct if they expressly or impliedly agree on a course of conduct that adversely affects an association or its owners. Similarly, joint and several liability may be imposed on board members who act tortiously in concert with each other, or with a third party other than the developer.
Civil Conspiracy Liability
A civil conspiracy claim is distinct from statutory joint liability under CRS § 13-21-111.5(4).24 To establish a civil conspiracy between a developer-appointed board member and the developer, an association must prove each of the following elements:
(a)The board member and the developer expressly or tacitly agreed to accomplish either an unlawful goal or a goal through unlawful means;
(b) One or more acts were performed to accomplish the goal, and either the goal or an act furthering the goal was unlawful; and
(c) These acts caused the plaintiff injuries, damages, or losses.25
Again, while an employer or principal generally cannot conspire with an employee or agent, this rule does not apply if the employee or agent also acts for...
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