Fid-doo-she-air-ee. What the heck is a fiduciary, let alone a fiduciary duty? “Fiduciary” means trust. A fiduciary duty is the legal responsibility to act solely in the best interest of another party. A person with a fiduciary duty has a legal obligation to maintain that trust. For example, lawyers have a fiduciary duty to act in the best interest of their clients.
Under Minnesota law, directors of homeowners associations—most of which are formed under the Minnesota Nonprofit Corporation Act, Minnesota Statutes Chapter 317A (“Nonprofit Act”)—are responsible for the management of the business and affairs of the association. This is true irrespective of whether an association is self-managed or professionally managed. While a Board may engage others to perform certain day-to-day tasks, the Board members must maintain oversight over those engaged, and ensure that all directors are fulfilling their duties to the association. In short, the members of an association’s Board of Directors owe a fiduciary duty to every member of the association that has entrusted its affairs—and its money—to the Board of Directors. The decisions the Board makes on behalf of the association bear directly on the safeguarding of each homeowner’s investment.
Basic Fiduciary Duties Directors Owe to an Association
In general, there are three basic fiduciary duties owed by directors to the association:
- Duty of Care
- Duty of Loyalty
- Duty of Obedience
Duty of Care
The duty of care requires a Board member to discharge duties “in good faith, in a manner one reasonably believes to be in the best interests of the organization, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” (See Section 317A.251 of the Nonprofit Act.) The individual must devote the time, attention and resources necessary to understand and prudently oversee the affairs of the association.
A “good faith discharge of duties” includes seeking the advice and opinions of its professional advisors—including accountants, attorneys, and management agents—as long as the director reasonably believes that the matter is within the advisor’s professional or expert competence. It is, therefore, extremely important to ensure that advisors are well-versed in community associations.
- Act Prudently: Upholding the duty to act in the best interest of the community association is not simply a good idea, it is the law.
- Seek advice and counsel of professional advisors – including accountants, attorneys, and management agents – but ensure that those advisors are well-versed in community associations.
- Abide by and uniformly enforce the community association’s governing documents. If the Board of Directors makes a business decision against enforcement of a particular provision in the governing documents (often because it is unpopular or will affect a significant number of homeowners), the Board must appreciate the consequences. The Board may unintentionally establish a precedent that makes future enforcement difficult, and may open itself to liability for failing to discharge its responsibilities to the community association. Remember, the fact that a restriction is unpopular does not absolve the Board from its obligation to enforce that restriction.
- Be Familiar with your Governing Documents: Board members must be familiar with their community association’s governing documents: the Articles of Incorporation, Declaration, Bylaws and any Rules and Regulations.
- Act in Accordance with your Governing Documents: Board members must act in compliance with their community’s governing documents and applicable state law. While such a duty seems obvious, it is far more difficult to meet the duty in reality than in concept. Board members should refer to the documents frequently to ensure that the Board is following policies and procedures that are stated in those documents. Examples of issues on which Board can easily be “tripped up”:
- If the Bylaws require the annual meeting to be held on the third Saturday in November, the meeting must be held on that date—even if the membership is amenable to holding the meeting on a different date. Unless the Bylaws are amended to change the date on which the meeting is to be held, it must be held on the date stated in the Bylaws.
- If the Declaration absolutely prohibits leasing of homes in the community, then the Board of Directors must enforce that prohibition without exception. Unless the terms of the Declaration give the Board discretion to grant waivers of a general prohibition, the Board does not have any such discretion, and must enforce the provisions of the Declaration as written, no matter how sympathetic the Board may be to a homeowner’s plight.
- Directors must bear in mind that, in some cases, the provisions of an applicable statute (e.g., Minnesota Statutes Chapter 515B or the Nonprofit Act) may take precedence over the provisions of the association’s governing documents. It’s important to keep up-to-date with changes in the law and their impact on associations.
- Act in Association’s Best Interest: The responsibility to act in the best interest of the association is paramount in fulfilling the role of Board member.
Duty of Loyalty
The duty of loyalty requires the individual, when making a decision or acting on behalf of the association, to set aside personal or conflicting interests and act solely in the best interest of the association.
- Set Aside Personal Agendas. Each Director must put aside personal agendas, remembering the legal obligation to act in the best interest of the association as a whole.
- Act as a Unit. Board members must remember that they must always act as a unit – no individual has the authority to make decisions independently (unless the Board specifically grants that person such authority).
- Avoid Even the Appearance of Conflict of Interest. Under certain circumstances, a contract or transaction between an association and its director or an organization in which the director has a material financial interest is acceptable. However, if the transaction is challenged, the director will have the burden of establishing that the contract or transaction was fair and reasonable, that there was full disclosure of the conflict to the Board and that the contract or transaction was approved by the appropriate persons in good faith.
- Boards should consider establishing a written policy on avoiding conflicts of interest.
- Board members should ensure that conflicts of interest are appropriately addressed, and the association’s conflicts of interest policy (if one exists) is followed.
Duty of Obedience
The duty of obedience requires the individual to obey all laws pertaining to association and act in furtherance of the association’s purposes.
Directors should be familiar with state and federal statutes and laws relating to the business of the association. That is not to say directors must be experts in all applicable laws, but, at the very least, they must recognize when the services of a member of the association’s team of professionals (accountant, insurance representative, attorney, property manager, etc.) is needed. Directors must make reasonable efforts to stay informed about laws and issues related to associations, whether through reading of relevant periodicals or attending seminars provided by trade groups and/or industry professionals.
While the concept of fiduciary duties may seem complicated, it boils down to a couple simply concepts:
- Do the best job you can.
- Do what’s best for the Association.
