Fiduciary Responsibility

Tahoe Donner’s board of directors is the governing body of the association and ultimately responsible for the direction and oversight of the affairs of the organization. Tahoe Donner’s board of directors is made up of unpaid volunteers elected by the membership. Members of the board of directors act as representatives for the property owners of Tahoe Donner and, as such, they must become familiar with, abide by, and uphold the association’s governing documents, such as the Declaration of Covenants and Restrictions (C&Rs), the bylaws, and the regulations contained in the architectural standards, and covenants rules. These governing documents establish the specific duties and powers of the board, outline the parameters of board authority and jurisdiction, and establish the rules that are required for the good of the community.

Board of Directors and Fiduciary Duty

The director must remain focused on the best interests of the corporation. Loyalty to the corporation means subordinating personal objectives and needs to the financial requirements of the association.

The board is subject to two broad duties:

• DUTY OF CARE (due diligence; duty to investigate)
• DUTY OF LOYALTY (no self-dealing)

In this regard, Civil Code Section 1366 explicitly provides that the homeowners association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and the Davis-Stirling Act, California Civil Code Section 1350.

Fiduciary Duty: A duty to act for someone else’s benefit, while subordinating one’s personal interest to that of the other person. It is the highest standard of duty implied by law (e.g., trustee, guardian). — Black’s Law Dictionary

Because board members are entrusted with the money and property of the association they are held to a higher standard and must avoid conflicts of interest. They are deemed “fiduciaries” and have a duty to act in the best interests of the membership and corporation.

Directors of nonprofit corporations such as Tahoe Donner Association are fiduciaries who are required to exercise their powers in accordance with the duties imposed by the Corporations Code. This fiduciary relationship is governed by the statutory standard that requires directors to exercise due care and undivided loyalty for the interests of the corporation

Two Broad Duties.  Upon their election to the board of a common interest development, directors become fiduciaries with powers to act on behalf of the association. As fiduciaries, directors are held to a higher standard of conduct and have two primary duties: (i) duty of care, and (ii) duty of loyalty. This applies to directors of both incorporated and unincorporated associations.

1. DUTY OF CARE (Due Diligence; Duty to Investigate). Directors must be diligent and careful in performing the duties they have undertaken. (Burt v. Irvine Company.) Directors must:
2. Attend and participate in meetings so they can be informed about the association’s business.
3. Make reasonable inquiry re maintenance issues, rules violations, safety, etc.
4. Make decisions.
5. Keep corporate records.
6. DUTY OF LOYALTY (No Self-Dealing). Directors must act in the best interests of the association even if at the expense of their own interests. This is more than just embezzlement of funds; it includes steering contracts to family members or taking actions that result in personal benefits to the director at the expense of the association. Violation could result in (i) liability for all profits received, (ii) all damages caused by the breach, and (iii) punitive damages.

The duty of loyalty also extends to the support of board decisions by all individual board members.

Business Judgment. In determining whether directors violated their fiduciary duties, courts will use the Business Judgment Rule. To avoid potential breaches, boards, like the Tahoe Donner Board, adopt ethics policies to guide directors.

California Business Judgment Rule.  Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy. Thus, subordination of individual property rights to the collective judgment of the owners association together with restrictions on the use of real property comprise the chief attributes of owning property in a common interest development.

California also has a statutory business judgment rule. Corporation Code Section 7231, subdivision (a) provides, in relevant part, ” [a] director shall perform the duties of a director . . . in good faith, in a manner such director believes to be in the best interests of the corporation and with such care . . . as an ordinarily, prudent person in a like position would use under similar circumstances.” Subdivision (b) provides that the director is entitled to rely on information, opinions, and reports presented by certain specified persons. Finally, subdivision (c) provides, in relevant part, “[a] person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director . . . .” (Italics added.)

A common occurrence with homeowner associations, the holding assessments artificially low due to owners political pressures on boards is the bane of many associations and the number one reason why reserves are under‐funded and special assessments occur. Tahoe Donner’s board has a specific policy and funding plan in place to address future funding demands of our aging association.

Tahoe Donner Association prepares its annual revenue and expense budget in accordance with applicable laws, its own governing documents and budgetary policies and procedures. The association’s approved budget also reflects the fiduciary responsibility of the board and management, in protecting all owners investment in the association, both for the current budget year and into the future. The process begins with general direction from the board of directors regarding influential factors, such as the level of service to be provided, new community projects, economic conditions and changes to business operations. Capital and equipment expenditure budgets are formulated to determine the funding needs for the Replacement Reserve Fund, the New Machinery and Equipment Fund and the Development Fund. The operating budget is traditionally developed with attention to historical trends in revenue generation, consideration of economic factors that may influence revenue or expenses, achievable cost reductions across all departments, service levels to be achieved and staffing levels required. The finance committee participates in reviewing the budget prior to submittal to the board of directors and offers input for the board’s consideration. The general manager and director of finance and accounting then present the staff-recommended budget for board review. The board subsequently directs staff to incorporate revisions it feels are appropriate. Please see our financials section for the current budget report and other financial information about your association.

Source: Information in this article was sourced from davis-stirling.com.