Community Associations’ Board of Directors Owe a Fiduciary Duty to Members

October 9th, 2014

Posted in Business & Corporate Law

Both the Condominium Act and Chapter 720 of the Florida Statutes governing Homeowners Associations impose a fiduciary duty on directors and officers of community associations to the members.[1]  One of the most important questions community association board members or officers can ask is whether a proposed decision or action would be congruous with their fiduciary obligation to the members.

It is difficult to place a precise definition on the fiduciary duty, which is largely attributable to its origins in equity (common law England) and development under principles of fairness.[2]  Because its definition lacks precision, it is important to have an attorney examine the particular facts of any proposed action or situation and perform research to determine if courts or other deciding authorities such as arbitrators have faced a similar set of circumstances.  However, “fiduciary duty” is a broad term encompassing several principles and can be generally described as an obligation to act in the best interests of the persons with whom you are in a fiduciary relationship, or the beneficiaries.  Thus, board members and officers have a duty to act in the best interests of the membership.

As stated above, “fiduciary duty” is a term that describes a broader range of principles.  One such principle constituting part of the fiduciary duty is the duty of loyalty.  The duty of loyalty requires that the fiduciary place the interests of the beneficiary above her own and to refrain from deriving an improper benefit by virtue of the relationship between the parties.[3]  As part of the duty of loyalty, the fiduciary is prohibited from engaging in self-dealing and engaging in transactions that are in conflict with the interests of the beneficiaries.[4]  Another duty constituting part of the fiduciary duty is the duty of care.  The duty of care requires the fiduciary to act in an informed manner and to act reasonably and prudently in carrying out its responsibilities.[5]

In the context of community associations, and perhaps in part due to the fact that directors and officers of community associations generally serve without compensation, Florida courts have generally limited fiduciary liability to circumstances where a particular director or officer engages in “actual wrongdoing” such as fraud, self-dealing, betrayal of trust, or unjust enrichment.[6]  Thus, even if a director or officer makes a poor decision that causes harm to the association or its members, he or she will not necessarily be held personally liable for his or her decision absent a showing of fraud, self-dealing, etc.  Further, even if the decision rises to the level of negligence, a director or officer should be protected by the business judgment rule, which stands for the proposition that decisions of directors or officers will not be questioned unless there is a showing of fraud, self-dealing, dishonesty, or incompetency.[7]

The fiduciary duty is a principle encompassing several sub-duties and responsibilities arising out of the relationship between the directors and officers and the members and is difficult to precisely define.  Accordingly, when a director or officer believes that he or she might be at risk of being held in breach of fiduciary duty, it is necessary to have a skilled community association law attorney review all of the facts and circumstances concerning the decision or action and analyze them in light of case law, arbitration decisions, and other deciding authorities to determine the level of risk and actions that may be taken to reduce the potential for personal liability.  Lastly, community associations should be sure to purchase a director and officer liability insurance policy (commonly referred to as a “D&O policy”) to protect against claims of breach of fiduciary duty.

[1] Section 718.111(1)(a), Fla Stat. (2014); Section 720.303(1), Fla. Stat. (2014).

[2] See generally John F. Mariani, et al., Understanding Fiduciary Duty, Fla. B.J., March 2010, at 20.

[3] See id.

[4] See id.; see also William P. Sklar, Concept of Condominium Ownership, in Florida Condominium And Community Association Law 1-1, 1-31 (2d ed., 2011).

[5] See id.

[6] See e.g. Taylor v. Wellington Station Condo. Ass’n, Inc., 633 So. 2d 43, 45 (Fla. Dist. Ct. App. 1994) (citations omitted); see also Sonny Boy, L.L.C. v. Asnani, 879 So. 2d 25, 27 (Fla. Dist. Ct. App. 2004).

[7] See Perlow v. Goldberg, 700 So. 2d 148, 150 (Fla. Dist. Ct. App. 1997) (directors not held liable where they were at most negligent in administering insurance funds); see also Sonny Boy, L.L.C. v. Asnani, 879 So. 2d 25, 27 (Fla. Dist. Ct. App. 2004).

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