In the HOA management industry, we often run into board members who not only don’t understand a law, but don’t even know it existed in the first place. Sure, most have a basic idea of what they can or can’t do and why they can or can’t do it; but, as a result of a lack of a bar to entry in the board member field, it is a very common occurrence to run into board members who implement actions without realizing they are breaking a law. While expected, and not at all rare, this can often lead to some very unfortunate circumstances that—sadly—may result in lawsuits, which is certainly something you want to avoid. With that in mind, we decided that it would be a good idea to create a series of blog posts pulling the veil of mystery away from the crucial laws that Arizona and Texas employ when governing homeowners associations. Thus, every week we will publish a post detailing a law or two so you can get more familiar with what constraints you have to operate in; it’s boring, law school stuff, but extremely important if you want to manage your community correctly, without getting sued. Without further ado, let’s get started with today’s subject “Fiduciary Duty”, as defined by A.R.S 10-3830, A.R.S 33-1811, A.R.S. 33-1243(C), and other subsections in Arizona’s Revised Statutes.

What is Fiduciary Duty?

At its core, fiduciary duty dictates how board members, officers, and directors must make their decisions when serving the homeowners association. The general summary of this can be found here, but basically boils down to this: if you are on a board, you must make decisions that are believed, to the extent of your knowledge and your skills, to be for the good of the association. These actions and decisions must be made with reliance on “information, opinions, reports, or statements…presented by one or more officers or employees of the corporation…legal counsel and public accountants…

[or] a committee of or appointed by the board of directors of which the director is not a member”. Without the above counsel, the director may be considered to not be acting “in good faith” which can be grounds for discharge of duties, or even lawsuits in certain situations.

No Compensation for Board Members

This segment of Arizona HOA law may be apparent to most board members—even if it’s not always carried out. However, there are intricacies to this law that many are not aware of (especially in self-managed communities) and thus, these laws end up being broken; one such intricacy is the mandate that you must avoid conflict of interest when serving the board. The actual text of this law states:

“If any contract, decision or other action for compensation taken by or on behalf of the board of directors would benefit any member of the board of directors or any person who is a parent, grandparent, spouse, child or sibling of a member of the board of directors or a parent or spouse of any of those persons, that member of the board of directors shall declare a conflict of interest for that issue. The member shall declare the conflict in an open meeting of the board before the board discusses or takes action on that issue and that member may then vote on that issue. Any contract entered into in violation of this section is void and unenforceable.”

In other words, if you are voting on an action, say hiring a vendor, that involves or would benefit a close family friend or family member, you may participate within said vote BUT you must make your other board members aware of the situation that you are in. If you do not and it is later found that your vote was a conflict of interest, then whatever action follows is “void and unenforceable”, or otherwise must be overturned. In many cases, this can extend to compensation of board members—especially if your governing documents do not allow for compensation. So keep this in mind—and consult your governing documents—before accepting compensation for your services as a board member

Other things to Keep in Mind

When it comes to keeping to the Duty of Loyalty, as it’s called, you also need to understand that conflict of interest isn’t just reserved to making decisions and drawing up contracts—it also has to do with equal enforcement of the governing documents. This means you must ensure that everyone follows the same rules outlined by the CC&Rs and bylaws, no matter if they are a board member, a family member, or a complete stranger within the community. If you are found to have enforced the documents unequally, you may set the association up for legal action depending upon the circumstances. Here is a small list of actions that we have encountered that wouldn’t be okay under these laws:

  1. Allowing Board Members to Skip Out on HOA Fees
  2. Enforcing a rule, such as house paint regulations, irregularly throughout the neighborhood.
  3. Giving friends or family special privilege when it comes to fees, rules, and contracts

Conclusion

At the end of the day, it is your job as a board member to make absolute certain that you follow the letter of the law. That means to dedicate your time towards helping your community grow, while avoiding conflict of interests and other issues that could alienate your fellow homeowners. So, judge equally, dictate properly, and make sure that your uphold your fiduciary duty to the best of your ability. This will hopefully allow you to avoid lawsuits that could cripple your association when all is said and done. Thanks for reading!

Tyler Fleck

DISCLAIMER

Spectrum Association Management, LP offers this information for educational purposes only and not as legal advice. The information provided in this article does not create a client relationship between you and Spectrum Association Management, LP, nor is this article a substitute for legal advice. The contents of this article are subject to change without notice. You should not rely or act upon the contents of this article without seeking advice from your own attorney. Spectrum Association Management, LP is not a law firm. Spectrum Association Management, LP provides information in this article as a general resource to clients and other interested readers. By making available access to this article, (i) Spectrum Association Management, LP is not purporting to render legal or other professional advice or opinions on specific facts or matters and (ii) Spectrum Association Management, LP is not creating or intending to create a client relationship between you and Spectrum Association Management, LP.