When owners are elected or appointed to the board of directors, it’s critical to understand the importance of fiduciary duties. A fiduciary is a person “to whom property or power is entrusted for the benefit of another.” In homeowner and condominium associations, directors are fiduciaries who must act in the best interests of the association and the membership as a whole. Washington law states:

A director shall perform the duties of a director, including the 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. (RCW 24.03)

Oregon’s standard of conduct for directors is similar:

General standards for directors. (1) A director shall discharge the duties of a director, including the director’s duties as a member of a committee:

(a) In good faith;

(b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

There are four key elements to fiduciary duties:

1. Act in the best interests of the association

Board members must act in the best interests of the entire membership. In other words, directors may not favor particular members because of personal interests, friendships, or financial gain. This also implies that directors must put their own interests below the interests of the community, even if those interests conflict.

2. Act with care and seek advice

Courts generally review actions of board members and compare those actions with what a reasonably prudent person would have done in the same circumstances. If directors must make decisions with legal implications, then an attorney should be consulted. If issues arise involving tax or financial issues, the board should speak with an accountant. Get expert advice when necessary in order to make informed decisions. Acting with care also requires acting within the scope of the board’s authority. There must be authority for every action and decision of the board, whether it’s from state law, the CC&Rs, bylaws, or rules and regulations.

3. Act in good faith

Board members are generally protected from personal liability if they exercise sound judgment and fulfill their fiduciary duties. However, if board members make decisions based on fraud, malice, or discrimination, personal liability may arise because of the failure to act in good faith.

4. Avoid conflicts of interest

Oregon law defines a conflict of interest as: 65.361 Director conflict of interest. (1) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest.

Conflicts of interest arise when board members make decisions in which they have a personal or financial interest. If those situations arise, board members must disclose the conflict and (in most cases) recuse themselves from voting.

Board members in community associations owe fiduciary duties to the association and the membership. Fiduciary duties are duties above and beyond the normal obligations which a person owes to the public and to fellow citizens. This means that board members must act and make decisions which are in the best interest of the community, even at the expense of the board member’s individual interests. Just because you’re a volunteer, this duty is not diminished.

Under the scope of fiduciary duties, the law imposes two duties: the duty of loyalty and the duty of care. The duty of loyalty requires board members to avoid self-dealing during the course of decision making. The duty of care means that a board member must consider the best interests of the association when acting as a board member.

Fortunately, courts have adopted the “business judgment rule”. This rule states that the court will not second guess a decision of the board or hold a board member personally liable. The rule will apply so long as the board members fulfilled their duty of care and duty of loyalty. Thus, if an owner sues the board over a decision the court will apply the business judgment rule and insulate individual board members from personal liability.

A Washington State Court of Appeals Case applied the business judgment rule after an owner sued the board and association for alleged maintenance issues. The board undertook an investigation and even hired different experts to determine the cause of a water leak into the owner’s unit. Nevertheless, the owner sued the board. The Court refused to hold the board members liable:

Because they are given this wide latitude, the law will not hold directors liable for honest errors, for mistakes of judgment, when they act without corrupt motive and in good faith, that is, for mistakes which may properly be classified under the head of honest mistakes. And that is true even though the errors may be so gross that they may demonstrate the unfitness of the directors to manage the corporate affairs. This rule is commonly referred to as the "business judgment rule."

Keep in mind that the business judgment rules requires that board members:

1. Are informed about association business and affairs;

2. Attend and participate in meetings;

3. Are knowledgable about the governing documents of the association; and

4. Seek outside help (accountants, lawyers, or other experts) when necessary.

With any major decision each board member should ask if they have done everything necessary in order for the business judgment rule to apply.

Board Member Fiduciary Duties

Avoiding Personal Liability as a Board Member