Cohousing-L Mailing List: Re: Fiduciary Responsibilities - Taking Care of the Community

[David Clements and Evan Richardson (evdavwes]

Thanks for bringing up the topic.  I am not a lawyer, but would love to hear 
input from any lawyers about this.  


For our community ( www.westwoodcohousing.com ), the responsibility of the 
Board was defined in our original declaration and bylaws as everything other 
than approving the amount of the annual budget and assessments and electing the 
Board, which authority is reserved to the members.  In this respect, our HOA 
(Homeowners Association) is set up like the other 99% of HOAs that are not 
cohousing.  So we have a huge potential for conflict, since many (but not 
necessarily all) residents assume that in cohousing the members themselves 
should have significant authority for many aspects of community life, rather 
than just electing a Board and turning over their authority to the Board.  .  


We have had conflicts related to the Board being perceived as doing "too much," 
when it exercises the authority given to it in the bylaws, and doing "too 
little," when members of the Board assume that they do not have the authority, 
and fail to act or defer to members.   


I have come to feel that the most important way to minimize this kind of 
conflict, for communities that have a small elected Board (as opposed to 
communities where many or all members are legally on the Board), is to be very 
clear about what authority they want the Board to have.  In our state (NC) this 
would involve including in the declaration any authority that we might want to 
give to members which is usually given "by default" to the Board.  For example, 
the authority to create rules and regulations.  The NC Planned Community Act 
specifies that the Board has the authority to create rules "by default," unless 
the declaration specifies otherwise.  If we want the members to have the 
authority to create rules and regulations, we need to specify this in the 
declaration.  We have not actually done this, although historically the only 
rules and regulations we have ever adopted have been by member decision rather 
than Board decision.  We have thus left ourselves open to a legal challenge 
based on the fact that our rules were not properly adopted.  (Knock on wood, no 
one has challenged the rules yet.)


The Board has a "fiduciary responsibility" to the owners and the HOA.  One 
aspect of this fiduciary responsibility is that the Board carry out any 
responsibilities given to it by the members/owners.  These responsibilities are 
typically detailed in the declaration and bylaws.  If the Board feels that some 
of the things specified in the declaration are not in the best interest of the 
community, the Board still has the responsibility to carry out the 
responsibilities.  To fail to carry out the responsibility is by definition a 
violation of the Board's fiduciary duty.  If the Board determines that an 
existing provision in the declaration is unwise or imprudent, the only action 
the Board can take consistent with its fiduciary responsibility is to convince 
the members to change the declaration, and meanwhile continue to enforce the 
provision.  


For example, if the declaration specifies a "pet policy" (as some declarations 
do) saying that pets over 50 pounds are prohibited, and the Board tolerates or 
allows a 60-pound dog on the property, the Board is violating its fiduciary 
responsibility to owners.  Even if the Board determines that a different pet 
policy is in the best interests of the community.


Another example:  Conventional wisdom says that for HOA Boards, investing HOA 
funds in any instrument that may lose value, such as Municipal Bonds, reflects 
poor business judgment and is thus a violation of fiduciary responsibility to 
the owners.  The members of a  Board which approves such an investment are 
individually vulnerable to a lawsuit from owners to recover personally from 
them any amount lost because of their action.     However, if the range of 
permitted investments is specified in the Declaration or Bylaws, and the Board 
invests according to the policy, the Board's actions by definition carry out 
its fiduciary responsibility.  


The concept of "fiduciary responsibility" applies whenever a Trustee or elected 
Board makes decisions on behalf of individuals or owners.  It does not apply to 
decisions the individuals or owners make for themselves.  There is no legally 
enforceable requirement that owners, when acting as a group on their own 
behalf, make "good" or "sound" decisions.    


I have heard the opinion that the HOA owner/members should not make financial 
decisions for themselves because they have no "fiduciary responsibility" to 
themselves:  only the Board has a fiduciary responsibility to the owners, and 
therefore the Board will make "more responsible" decisions -- so the argument 
goes.  I think this argument misses one main point of cohousing:  That it is a 
legitimate choice for people to govern themselves, rather than to elect a 
government and turn over their power to them.  Self-governance may not always 
be pretty or easy, and many people may reasonably choose not to live this way.  
But for those who do, it can be deeply satisfying and often exhilarating.   For 
those who prefer to have an elected Board make decisions for them, there are 
plenty of other places to live (the other 99%).


David Clements





Message: 3
Date: Wed, 4 Jul 2012 09:40:06 -0700
From: "Norman Gauss" <normangauss [at] charter.net>
Subject: [C-L]_ Fiduciary Responsibilities - Taking Care of the
        Community
To: "'Cohousing-L'" <cohousing-l [at] cohousing.org>
Message-ID: <01d601cd5a03$abad5e80$03081b80$@charter.net>
Content-Type: text/plain;       charset="US-ASCII"

Our community has a long history of trying to minimize arbitrary actions by
the Board of Directors.  The feeling is that, in cohousing, the whole
community should be making important decisions.   The literature is replete
with stories of domineering Boards lowering the boom on the HOA without any
recourse from the membership.

 However, in California, the whole community may make ill-advised decisions
with legal impunity that may make living here potentially hazardous with
respect to personal safety, susceptibility to fires, termite infestation,
attacks by dogs, access to emergency vehicles, and preventative measures
minimizing the need for special assessments.  But the whole community does
not have fiduciary responsibilities for its members and cannot be held
liable for negligence or purposely making decisions based on personal
preferences of a few members.

The Board of Directors, being a fiduciary body, legally cannot let personal
interests of its members be a basis for its decisions.  It must have the
welfare of the community in mind rather than the welfare of its members.  If
found to have been negligent or to have purposely made decisions that were
not in the best interests of the community, it can be accused of malfeasance
and liable to be sued.  Our membership is uncomfortable with the Board
making unilateral decisions and is not willing to give the Board leeway to
act in the best interests of the HOA.

Does this type of conflict exist in other cohousing communities?

Norman Gauss