Duties of Homeowners Association Directors

Directors of community associations, like directors of other nonprofit corporations, are not guarantors of the success of the association and are not typically liable for mere mistakes in judgment. Courts require only that directors act as ordinary, prudent people and do not hold them to a standard of prudent business people. They recognize that directors must sometimes make difficult cost-benefit decisions and will not generally second-guess those decisions as long as the directors acted in good faith, and in a manner they believed to be in the best interests of the association, and as reasonably prudent people.

Duty of Ordinary Care

The directors of a homeowners association are held to a duty to exercise ordinary care in their actions as directors, and are further obligated to avoid self-dealing and conflicts of interest. Examples of cases where a director breaches his or her duty of care might include mismanagement of association funds, failure to enforce the governing documents, and failure to maintain the association’s premises. A determination of whether or not a director has exercised ordinary care in his or her actions necessitates consideration of the following three factors:

• Was the act performed in good faith;
• Was the act performed in a manner that the director believed to be in the best interests of the association; and
• Was the act performed with such care as an ordinarily prudent person in a like position would use in similar circumstances, including reasonable inquiry.

If a volunteer director satisfies the above elements, he or she should not be subject to liability for damages arising out of their conduct by virtue of the “business judgment rule.” However, directors could lose the protection of the business judgment rule by delegating too many duties. Although directors are generally authorized by state statutes and/or the association’s bylaws to delegate certain management responsibilities to another person, management company or a committee, the ultimate responsibility for the management of the homeowners association still rests with the board of directors. Another exception to the general rule where a director could have potential exposure to liability is a situation where he or she, in seeking election to the board, may have represented that they have special expertise such as an attorney, architect, or accountant. Such a director could conceivably be held to a higher standard of care on the basis of their representations.

A director’s corporate duty of ordinary care is typically created by state statutes and is owed to the association’s members and not to third parties or other members of the public. Thus, a director may generally be held liable to a third party under common law theories of negligence for breaches of their common law duty to exercise ordinary care when he or she has engaged in tortuous conduct that has caused injuries to a third person. Such liability is independent of whether the director was acting on behalf of the association, which may also be exposed to liability as a result of the director’s actions.

Doctrine of Judicial Deference