Owner Association Board Member Duties and Liabilities, 0621 COBJ, Vol. 50, No. 6 Pg. 20
| Author | BY RONALD M. SANDGRUND, JOSEPH F. (TRIP) NISTICO III, AND JERRY ORTEN. |
| Position | Vol. 50, 6 [Page 20] |
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 hoard members, owner associations, and owner association unit owner members. This part 1 focuses on association board members' legal duties and liabilities.
In common interest communities1 subject to Colorado's Common Interest Ownership Act (CCIOA) all owner association (association) boardmembers owe legal duties to both the association and its owner-members (owners).[2] Courts carefully examine the conduct of association boardmembers that the community's developer appoints while the developer controls the board (declarant control period),3 because conflicts of interest may exist between the developer 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
Thispart 1 examines association board members' legal duties andpotentialliabilities.
Association Overview
Under CCIOA an association must be organized no later than when the first unit is conveyed to a purchaser.5 The association must be organized as a "nonprofit, not-for-profit, or for-profit corporation or as a limited liability company... "6 Regardless of how it is formed, the board is the body designatedin the community's main governing document, the "declaration,"7to act on the association's behalf. Unless prohibited by CCIOA, the declaration, or the bylaws, the board "may act in all instances on behalf of the association."8 Association board member duties are primarily controlled by CCIOA and the Colorado Revised Nonprofit Corporation Act (Nonprofit Act) but other statutes, such as Colorado's Business Corporation Act (Corporation Act), apply in some circumstances.9 CCIOA controls if these laws conflict.10 The association owes many duties under CCIOA.11 The board is responsible for satisfying these duties as well as any duties set forth in the community's governing documents. In addition, as discussed below, the Nonprofit Act standard of care arguably applies to the board's execution of all these duties.12
Fiduciary Duties Generally
The starting point for analyzing board member duties is determining whether the member owes a fiduciary duty. "A fiduciary is a person having a duty, created by his or her undertaking, to act principally for the benefit of another in matters connected with that undertaking."[13] A fiduciary's common law "obligations to the beneficiary include, among other things, a duty of loyalty, a duty to exercise reasonable care and skill, and a duty to deal impartially with the beneficiary."[14] A fiduciary duty may arise w here a "superior party" assumes a duty to act in a "dependent party's best interest."15
As discussed below, when and to what extent association board members owe fiduciary duties depends on whether the board member was appointed by the developer or selected by the owners. For purposes of this article, board members selected to fill board vacancies by developer-appointed board members who constitute a majority of the board are treated as developer-appointedboardmembers. Similarly, boardmembers selected to fill board vacancies by owner-elected board members who constitute a majority of the board are treated as owner-elected board members.16
Association Board Member Duties Generally
Board members may be appointed by the developer during the declarant control period or selected later by the owners, usually by election.17 Board members' duties are defined to some extent by statute and often also described in the association's governing documents. These documentsmayinclude the declaration and the communityplat ormap, articles of incorporation, bylaws, rules, regulations, policies, procedures, and architectural guidelines.18 In the event of any conflict, CCIOA controls.19
Board members have common law fiduciary duties, and the common law may inform judicial interpretation of their statutory duties.20 Courts have imposed common law fiduciary duties on association developers and board members to, among other things, (1) manage and maintain common property with reasonable care, (2) establish proper reserves to fund future repair or replacement needs, and (3) disclose all material facts regarding the condition of property the association is required to maintain.21
Board members generally owe fiduciary duties only to the association and its owners (comprising the association membership),22 and not to the public at large.23 These baseline duties arise primarily from the Nonprofit Act, whose statutory duties often overlap with, and sometimes preempt, a director's common law duties. Directors' Nonprofit Act duties include the broad duties to act
■ within the scope of the board member's statutory authority and as permitted by the community's governing documents;
■ in good faith, with prudence, and in a manner the board member reasonably believes to be in the association's best interests (duty of good faith or duty of care);24 and
■ with undivided loyalty to the association, onlyfor the association's benefit, andnotfor a board member's own personal advantage (duty of loyalty).[25]
Other duties prohibit directors from
■ disclosing information about the association's activities (unless that information is already known to the owners or to the public, or is a part of the association's public records, such as its board meeting minutes);26
■ violating the law or engaging in misconduct;27
■ improperly transferring or encumbering the association's assets;28
■ borrowing money from the association;[29] or
■ taking the association's business opportunities or confidential or proprietary information.[30]
While compliance with the Nonprofit Act's duties of care sometimes affords a "safe harbor," CCIOA imposes different and/or additional duties on developer-appointedboaxdmembeis, while providing that owner-electedboard members are generally liable only for their willful and wanton acts and omissions.31
Board Members' Conflicts of Interest
The Nonprofit Act's conflict of interest provisions apply to all boardmembers, whether appointed by the developer or elected by the owners. They prescribe how board members are to manage "conflicting-interest transactions."32 In addition, all associations subject to CCIOA33 must adopt and maintain conflict of interest policies or rules for their board of directors.34
Generally, an association may not make loans, provide assistance to, or enter into a contract with its board members, their families, or their businesses,35 and any board member who engages in a conflicting-interest transaction must repay the association for its losses.36 However, board members are not liable for conflicting-interest transactions if they disclose their relationship or interest to other board members before the board approves the transaction, provided the transaction's approval is made in good faith.37 Board members will also not be liable for conflicting-interest transactions to the extent that these are "fair" to the association.38
Although CCIOA states that owner-elected boardmembers are liable onlyfor their "wanton and willful acts or omissions,"39 it has not been decided whether owner-elected board members are personally liable for violating the Nonprofit Act's separate conflict of interest prohibitions if they do not act willfully or wantonly.40 Generally, the law frowns upon board members who approve transactions in which they have a financial interest.41 It is also unclear whether owner-elected and/or owner-appointed boardmembers can be held liable for "wanton or willful acts or omissions" if these acts or omissions were later voided.
Owner-Elected Board Member Fiduciary Duties
The Court of Appeals in Woodmoor Improvement Ass'n v. Brenner confirmed that association board members, like other corporate board members, owe fiduciary duties to the association under the common law.42 In Woodmoor, the Court affirmed the lower court's exoneration of an owner-elected boardmember for alleged breaches of fiduciary duties for convincing other board members to approve a satellite dish that the association's covenants arguably prohibited. The board member did not participate in the board's vote.
The scope of a board member's duties varies depending on whether the board member was appointed by the developer, appointed by a developer-controlled board to fill a vacancy, elected by the unit owners, or appointed by an owner-controlled board to fill a vacancy. This question of who chose the board member—the developer, the owners, or the board itself—also affects the standard of care to which the board member is held and the defenses available to members responding to allegations that they breached their fiduciary duties.
Does CCIOA Negate Owner-Elected Board Members' Fiduciary Duties?
Arguably, by negative implication, CCIOA relieves owner-elected board members of any fiduciary duties, and they are liable only for their wanton and willful acts or omissions, because CCIOA prevails over conflicting statutory and decisional law, including the Nonprofit Act and common law. Colorado's appellate courts have not squarely addressed this argument, although it appears to conflict with Woodmoor's holding, as explained below.
Analysis of this argument starts with CCIOA, which provides in relevant part:
(2) Except...
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