Does a Colorado HOA and/or the members of its board owe fiduciary duties to the general members? (column)
October 10, 2017
Does a Colorado homeowners' association and/or the members of its board of directors owe fiduciary duties to the general members? It's a simple question with a somewhat complicated answer.
Duties owed by HOAs
To start with, a fiduciary is a person who is required to act for the benefit of another person on all matters within the scope of their relationship. A good example of a fiduciary is the trustee of a trust. Fiduciaries traditionally owe duties that include good faith, loyalty, due care and disclosure. Sometimes fiduciary duties are governed by statute.
Courts in states other than Colorado generally hold that HOAs (and their board members) are fiduciaries of the general members for all purposes. However, Colorado courts have not espoused such a broad view and have only recognized that HOAs owe a fiduciary duty to enforce the restrictive covenants. This duty is based on the quasi-governmental functions that HOAs serve, and the impact on value and enjoyment that can result from the failure to enforce covenants. Even the fiduciary duty to enforce covenants is subject to a limitation known as the "business judgment rule," which recognizes that covenant enforcement requires HOAs to exercise discretion as to both the timing and manner of enforcement. The business judgment rule might justify an HOA not enforcing the covenants for good reason.
This duty is based on the quasi-governmental functions that HOAs serve, and the impact on value and enjoyment that can result from the failure to enforce covenants. Even the fiduciary duty to enforce covenants is subject to a limitation known as the “business judgment rule,” which recognizes that covenant enforcement requires HOAs to exercise discretion as to both the timing and manner of enforcement.
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In addition to the duty to enforce covenants, many HOAs in Colorado (and we won't get into specifics here) are governed by a comprehensive statutory scheme known as the Colorado Common Interest Ownership Act. Where the statute applies, every duty governed by the CCIOA must be carried out by HOAs (and, perhaps, their board members) in good faith. This makes HOAs limited fiduciaries of the general members with respect to carrying out duties under the CCIOA.
Duties owed by HOA board members
The duties owed by HOA board members in Colorado are different and more limited than those owed by HOAs themselves. For incorporated HOAs, the applicable statute, the Colorado Revised Nonprofit Corporation Act, does not expressly impose fiduciary duties and rather adopts "standards of conduct." Subject to certain exceptions, the CRNCA requires directors and officers with discretionary authority to discharge their duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director or officer reasonably believes to be in the corporation's best interests.
In the early days of a project before governance is fully turned over to the members, the developer (known as the "declarant") may retain the right to appoint members of the board. In HOAs where the CCIOA applies, the statute provides that these declarant-appointed board members are fiduciaries of the members. In contrast, the CCIOA provides that board members not appointed by the declarant — i.e. those elected by the general members — are not fiduciaries and are protected from liability for actions or omissions except those that are "wanton and willful." Colorado courts have not addressed the meaning of wanton and willful conduct under the statute. In general, conduct would probably be found wanton and willful if it is committed with an intentional or reckless disregard for the rights of the members. The theory behind protecting elected board members from liability is that it encourages willingness to serve. HOAs often further protect board members by indemnifying them or acquiring errors and omissions insurance covering them.
THE BOTTOM LINE
Colorado HOAs and their board members owe certain duties to the general members. In the case of HOAs themselves, this may include a fiduciary duty to enforce the covenants and to carry out duties under the CCIOA in good faith. In the case of the board members, there are standards of conduct under the CRNCA and additional duties and limitations under the CCIOA. The exact contours of these duties, including the interaction between the CRNCA and the CCIOA, have not been fully explored by Colorado courts.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.