Duties, what duties?

Directors of community associations are often concerned about their potential liability.  The actual risk of liability may not be great in some associations.  However, any such risk can be mitigated by directors if they act within the scope of statutory duties.

If you are a director and are saying “duties, what duties?” at this point, you need to pay attention.  If the association is a nonprofit corporation, the Arizona Nonprofit Corporation Act provides guidance.  A.R.S. § 10-3830 states in part:

1. A director's duties, including duties as a member of a committee, shall be discharged:
   
   1. In good faith.
   2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
   3. In a manner the director reasonably believes to be in the best interests of the corporation.

Acting in “good faith” means exactly as it sounds.  The director would be judged by a subjective standard.  Directors must make an honest effort to come to an informed decision with respect to each issue that comes before the board.  Did the director believe that he or she was doing the right thing and acting with sufficient information?  Was the director acting with a “white heart”?    

The second standard above by which directors in Arizona are judged is an objective standard.  “The care an ordinarily prudent person in a like position would exercise under similar circumstances” is a standard that would have the director judged against a fictitious person.  That person is “ordinarily prudent” and sitting in your position as a director and charged with making the same decision as you. Imagine (if you are a director) that a judge is sitting and reviewing a decision you made and applying this standard.  Imagine an expert witness testifying that you did not meet the standard.  What this means is that a subjective good faith decision is not enough if it is objectively unreasonable or unsupportable.  For instance, a director could believe that it is a great idea to invest association money in highly speculative stocks, but the ordinarily prudent person would invest such money in bank certificates of deposit or government securities.

Finally, directors need to make decisions that they reasonably believe are in the best interests of the corporation.  This standard has some subjective and objective aspects.  It is based on what the director personally believes, but that belief has to be “reasonable”, which is objective.  Using the same example above, a director might believe that seeking the speculative high rate of return on an investment is in the best interests of the corporation.  However, is that belief reasonable?

The final “best interests of the corporation” standard can also involve conflict of interest considerations.  Directors have a duty of loyalty to the corporation and should not act out of self-interest.  By definition, that would not be in the corporation’s best interest.  The most extreme example of self-interest is having a contract to provide services to the association.  However, the planned community and condominium statutes permit directors to declare a conflict in the board meeting and then vote on matters where a conflict exists.  Assuming the rest of the directors agree on the contract, voting in a manner consistent with their own duties, none of the directors breach their duties.