HOA board members personal liability

May the Gods help Virginia.

respectfully "improper" may mean that the Three Stooges honest incompetence ( default ? ) defence is not available.

Imo, the important words are knowingly engaging in willful misconduct or law-breaking. Mistakes are usually different matter.

But getting an attorney's advice is best. If you share the specifics of the action that's questionable, some here might be able to help!

My guess is if the act occurred a very long time ago, the director(s) would be off the hook, due to statutes of limitation, etc., but if last year, maybe not. Again, ask a profession.

We are an incorporated condominium.

JimW17 : The second part of the posting invites comment about retroactive indemnification of Directors.

1 - Respectfully, if one or more Directors' collective decision making met whatever standard imposed by state law and by site-specific governance documents, how could they somehow lose such such shield after leaving the Board ?

2 - "Impropriety" however might be unshielded and possibly uninsured whether for current or past Board membership. What is the alleged "impropriety" ?

Linda, to give you some idea of what the statute of limitations may be in Colorado, see http://statelaws.findlaw.com/colorado-law/colorado-civil-statute-of-limitations-laws.html . Looks like one to three years, in general. Virginia looks similar: http://research.lawyers.com/virginia/virginia-statutes-of-limitations.html .

There is a section of something called the "Restatement of Property (Servitudes)," focused on community associations such as HOAs. The Restatement is a compilation of case law nationwide. It summarizes trends in the courts and is regularly updated. The Restatement puts a lot of emphasis on how the courts do not like to penalize volunteer directors, lest members in general be deterred from volunteering to serve. The courts do not want to deter, given how Declarations make it extremely difficult to legally dissolve most HOAs; someone has to run the place; directors have enormous legal responsibilities and yet are unpaid. I believe it would take a lot of recklessness. with a truly devastating effect on a HOA, to get a judge or jury to impose even one dollar of personal liability on a director. If a member's HOA grounds look halfway decent, then suing in court will not likely win any punishment of a director except public embarrassment for being named and possibly found to be not following the governing documents.

I think BobD can cite a case or two where liability was imposed personally on a volunteer director. I have yet to see one.

//Homeowners have the right to have directors act within their fiduciary duties. Homeowners may bring an action against a director of a community association on the grounds of breach of fiduciary duty of the director. Directors, also sometimes referred to as Managers, Trustees, Administrators or the Executive Board, owe fiduciary duties of care to homeowners to exercise ordinary care in performing their duties, to act reasonably and in good faith in their performance of their duties as members of the governing body of the community association.

Directors must exercise reasonable diligence in following through and carrying out the responsibilities assumed by or assigned to them under the governing legal documents. Generally, directors must remain informed about the community association’s business at all times, be knowledgeable about the legal documents governing the affairs of the association, and attend and participate in the association meetings. Directors may be held responsible for obtaining and reading the minutes of those association meetings the director was unable to attend. Directors must also vote against actions taken or adopted by the Board of Directors that they are in disagreement with and record their disagreement in the meeting minutes. Failure to perform any of these duties in a reasonably diligent and prudent manner could expose the director to liability to homeowners for breach of fiduciary duty.

Homeowners do not have a right or guarantee that the decisions of the directors will be successful, because directors are protected by the “business judgment rule.” The policy behind this rule is to allow leeway for a director’s business judgment in business decisions, while discouraging the court from stepping into the director’s shoes to analyze the soundness of business decisions. So long as the decision was made in good faith, the director will be protected from homeowner suits by the business judgment rule. See Schwarzmann v. Association of Apartment Owners, 33 Wash. App. 397, 655 P.2d 1177 (1982).

Homeowners have the right to expect directors to bring all corporate opportunities to the community association. If they don’t, directors may be held liable for the usurpation of a corporate opportunity. Specifically, a director may not appropriate to his or her own use a business opportunity that belongs to the community association. See Kirtley v. McClelland, 562 N.E.2d 27 (Ind. App. 1991).

Homeowners have the right to have the directors be loyal to just the interests of the common interest community, and not to the self interests of the director. Where a conflict of interest arises, a director is responsible for notifying the Board of the conflict and removing himself from participation in any decisions regarding the subject matter of the conflict. If a director fails to do so, homeowners may bring a derivative action for lost profits.//

http://www.hindmansanchez.com/resources/article/homeowner-suits-against-community-associations/

On a related issue: if you are serving as a director, make sure that you review the association's D&O policy to ensure that both you and the association are adequately protected. Insurance is not a fungible item, and the devil is always in the details. From the article below:

//Another extremely important point: community association board members and property managers need to be aware of what is excluded in their current directors and officers liability policy. Many policies currently available exclude breach of contract, discrimination, employment issues and architectural issues, so as the old saying goes “buyer beware!”//

http://www.insurancejournal.com/magazines/features/2012/04/02/241157.htm

Therefore, in addition to finding and engaging experienced association counsel to assist it, an association's Board is strongly advised to find and engage an insurance professional who is experienced in community association insurance matters.

Hi Kerry,

Not a CA attorney, mind you, but located this that I believe may speak to your concern:

//"Due diligence" or the duty to investigate is one of the fiduciary duties of directors. Association boards of directors must make reasonable inquiry of rules violations, maintenance issues, reserve components, association finances, etc. before making decisions. This does not mean they must personally inspect water leaks or personally talk to vendors--they can rely on managing agents, committees or others to gather information for their review and discussion.

A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment. (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852-853.)//

http://www.davis-stirling.com/tabid/471/Default.aspx

A similar rule applies here in FL. FWIW, I have long espoused the position that if an individual chooses to serve on a Board of Directors, he/she has a duty to become reasonably conversant with the community's governing documents.

That doesn't mean that such a duty carries with it an obligation to rightly interpret the governing documents in all cases (even well-seasoned attorneys can, and often do, argue vociferously about their competing interpretations of specific verbiage), but it does mean that the director needs to dedicate meaningful effort to studying the governing documents, raise a question for discussion when a matter is unclear to him/her, and make the case to his/her fellow Board members for securing a legal opinion to guide them when the issue is subject to a reasonable difference of opinion and the Board's interpretation could serve to prejudice one or more owners in a substantial way.

I won't second-guess your Association counsel's legal opinion (no doubt that counsel had much more information available to him/her than I in assessing the issue), but if there were rather obvious errors made in assessing owners over the years, the failure to give your Board more specific guidance than what you've noted above is surprising. What happens to the owner who was overcharged for years but sold his/her property before receiving the appropriate adjustment? What happens if one of the owners discovers the error and decides that a visit to his brother-in-law the class action lawyer is in order? What happens when the association attorney undertakes to collect sums from an owner that the attorney knows are erroneous?

Every day that the Board delays/drags it feet in making things right subjects the Association to potential legal liability. Moreover, if the Board has decided to not disclose this information to its membership (as well as the former owners who have overpaid), an argument could be made that such owners/former owners are being defrauded.

I really like this quote, James: "A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment." (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852-853.)//

First, the errors weren't obvious because we have a very complicated set of three reserves accounts and a op. budget that receives assessments from the sources. I discovered some errors quite by accident. I'm not a numbers person and had relied on our treasurer, finance omitted and PM(s) concerning the budgets my first few year on the board.

Because of the complexity and because I didn't discover all of the errors at one time, but over a couple of years, I had difficulty explaining them to my fellow directors and to the PM.

A major problem is that our CC&Rs don't specify what % the three areas should contribute for various op. budget items OR for which line items! This, is all is found in the Dept. of RE Budget turned in to the state by the delver 15 years ago. So, I had to wade though budget worksheets and some narrative to understand.

At present, all 6 of us residential directors understand the issues to a great or weak degree. The 7th director reps the Commercial Owners in our mixed us condo high rises. And my finding do not benefit them at all.

More later, I really appreciate your comments, James! thanks PiTa. I guess you;re saying the directors who're dragging their feet & stalling are practicing non feasance? I'll look up later.

Thanks for the additional information, Kerry. It is very helpful to appreciate the context.

I will share these further general observations, for whatever you think they may be worth:

1. Directors certainly can rely upon those with specialized training and expertise in arriving at business judgments. However, whether that reliance is justified here would depend upon the relevant education and experience of the treasurer/finance committee members/property manager, their actual representations concerning their relevant education/experience, and the other Board members' due diligence in attempting to verify those representations. If none of the treasurer/finance committee members/property manager had dealt with matters of such complexity before, then they should have acknowledged that and at the very minimum have recommended soliciting the opinions of those WITH the appropriate level of education and experience.

2. Even assuming that no legal grounds exist to impute liability to the Board for its past failures to pick up on the financial irregularities that had occurred over an extended period of time (until you ultimately uncovered them), once the Board members HAD actual knowledge of those financial irregularities, they then had a duty to correct them.

3. If Association counsel has advised the Board but obliquely concerning its present obligations -- i.e., make restitution based on "general equitable principles" -- the Board might be well-served if it secured a second legal opinion or -- at a minimum -- asked its existing counsel to provide it with more specific guidance.

Augustin, Thank you for the link - lot of helpful information there.

Sad if the statute of limitations is at most 3 years. When I discovered improper accounting and tried to get the MC to make corrections, nothing was ever done. I suppose I should have sued way back then (15 years ago) but was told "right or wrong, mistakes were made" but they didn't want to lay blame. Promised that going forward they - board and MC - would make sure the accounting was done properly and the different types of homes would have their monies applied correctly. But that hasn't been done and has only gotten worse to the tune of $335K now being short in one class of homeowner.

I don't want to see anyone penalized. There is an easy fix since the money is there - just in the wrong bank accounts. It would only be necessary to make the required transfers and explain to the homeowners why the adjustments are necessary. It's not like I'm just coming up with $335k off the top of my head. Over the years, I've tracked the activity in the bank account and listed everything in spreadsheets that show when and why the errors occurred.

please email { [email protected] } me a copy of ANY policy which covers mal and/or non feasance

I will IMMEDIATELY reply with a wire transfer of $100 via paypal

if you can not, you are expected to do the same

?10 day clock?

Jim,

Our D&O policy covers:

1. any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty
or neglect by, including any Personal Injury or Publishers Liability, or any matter asserted
against, an Insured Person in his or her capacity as such;
2. any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty
or neglect by, including any Personal Injury or Publishers Liability, the Insured Organization;
or
3. any matter asserted against an Insured Person solely by reason of his or her status as such.

Insured Person means any natural person who was, is or becomes an Employee, duly elected or
appointed member of the board of directors, officer, member of the board of trustees, member of the
board of managers, member of the board of regents, member of the board of governors, or a functional
equivalent thereof, member of a duly constituted committee, or volunteers of the Insured Entity or any
Executive Officer.

ps.

? want a piece of the action ?

http://www.agcs.allianz.com/assets/PDFs/risk%20insights/AGCS-DO-infopaper.pdf

The key section is .....What is not covered?.....

My suggestion to everyone else who may be interested in the subject is to contact an insurance agent with 20+ years of experience in representing HOAs and Condo associations and find out for yourselves.

however:

'most' D&O policies will provide for a legal defense regardless of coverage for resulting award

perhaps this is the 'bone of contention'

James

PITA called you out to provide information/proof versus preach insurance sales. Care to respond to him?

aaaaaah ....

breach of (fiduciary) duty



may cover the legal defense ..... innocent until proven guilty ... etc

but

may NOT cover any monetary damages awarded

LOL - Law firm(at that time - Orten & Hindman)that instructed our board to take the homeowners to court to force a declaration amendment. Some of these lawyers helped write the CCIOA statutes.

And they lost the court case because they didn't follow CCIOA relating to the specific percentages that applied at the time.

However, our HOA didn't get a refund from them for their huge fees

I only have the hard copy. Is there a way to look that up online?

I would have to dig up the paperwork (in storage) for the specifics. But the year was 2001

If you do find something, can you let me know?

another illustration:

https://www.travelers.com/business-insurance/management-professional-liability/private-non-profit/community-homeowners.aspx

there are many, many more

Augustin - I've located the hard copy of that 2001 case where Orten-Hindman was the attorney for the board of our association. Without listing any identifying information, here is the judge's order:

THIS MATTER came before the Court on July 10, 2001, for a hearing on Petition for Court Approval of Amendments to Declaration Pursuant to C.R.S. #38-33.3-217(7) ("Petition")

C.R.S. #38-33.3-217(7)(e)(II) authorizes this Court to grant the Petition if it finds that "[n]o more than thirty-three percent of the unit owners entitled ... have filed written objections ..." The Court finds that 120 written objections to the Petition were filed prior to the hearing, and that this number represents more than thirty-three percent of the unit owners.

The Court further finds that this case should be dismissed as requested by objectors Txxxx and Bxxxxxxx. The declarations of the Xxxx Homeowners Association which were in existence on June 30, 1992 contained a specific conflict with the provisions of $38-33.3-217(7), and therefore the declaration which requires a 75% approval of any change to the declaration controls as opposed to 67% permitted by said statute.

For the forgoing reasons, the Court hereby DENIES the Petition for Court Approval of Amendments to Declaration Pursuant to C.R.S. #38-33.3-217(7)
................................................................................................................................
The above is exactly as written by the court with capitals in certain places - I did not capitalize anything myself.

Augustin - would you have a link where I can find this case online?

I would like to be able to provide it to other owners that have wrong ideas of what happened. The current board president who has only lived here ~ three years is spreading incorrect information about this case to suit his purposes in trying to get another amendment.