By Editorial Committee, CAI Rocky Mountain Chapter
Fiduciary Duty. It’s a phrase that is often heard in our industry; and we often field questions regarding exactly what that duty is and to whom it applies. Often, those questions are answered in relation to our boards. But does the duty extend to community association managers? Does it apply to others? In order to answer those questions, we need to first define what the phrase fiduciary duty means.
A fiduciary duty is a duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person.
A person having duties involving good faith, trust, special confidence and candor towards another is a fiduciary. So, who are fiduciaries? Directors, officers (and committee members), community association managers and agents of an association all owe a fiduciary duty to the association.
It is well accepted that association directors and officers owe a duty of undivided loyalty to their association. This is because directors and officers exercise discretion on behalf of the association and are responsible for the money and property of others. As such, they are in a “fiduciary capacity” and are held to the highest standard with a duty to act for the benefit of others and not for themselves.
Additionally, community association managers are generally considered (and by their management agreement, are contractually defined as) agents of an association, and therefore owe fiduciary duties to the association. Managers must 1) act in the interest of the association, 2) act in the same manner as fiduciaries who serve on the board or as an officer, and 3) must act only within the manager’s scope of duties as recited within the management agreement.
Managers, like board members, must act in the interest of the association. This is generally regarded as the Duty of Loyalty (aka Duty of Good Faith). This means that the association’s manager also has the obligation to act in good faith, fairly, and in the best interest of the entire association (and not the interests of individual homeowners). It also means that managers have the same restrictions regarding conflict of interest transactions, as well as upholding the duty to maintain confidences. Any information in the possession of the manager which is confidential in nature, must remain strictly confidential.
Finally, the manager has only the management authority delegated to it by the association’s governing documents, by direct instruction of the board, or in its management contract. Actions taken by a manager outside of the scope of authority can bind an association. This is called apparent (ostensible) authority. An association can be held liable for the actions of its officers, directors, its manager or other agent, even when the association does not know about, approve of, or benefit from those actions, as long as the agent reasonably appears to outsiders to be acting with the association’s approval.
How can an association protect against apparent authority? The board should take reasonable steps to ensure that the scope of its agents’ authority is clear to third parties and that agents are not able to hold themselves out to third parties as having authority beyond that which has been vested in them by the association.
Here is an example: A community association manager decides to enter into contracts on behalf of all of the associations within his portfolio to allow a waste management company to serve as the sole and exclusive agent on behalf of each association to negotiate, manage and advise the association on its agreements with solid waste and recycling services. The manager actually signed agreements for twelve different associations to contract with the company. The waste management company, having no reason to believe the manager could not sign contracts on behalf of the association, is now looking to each of the associations for a combined payment of over $50,000. The Boards are now asking how they could be contractually liable for the services when they never signed a contract. The answer is because of apparent authority.
In short, the existence of a fiduciary relationship means the fiduciary is required to act reasonably, prudently, and in the best interest of the association. It should go without saying (but will be said) that a fiduciary must not engage in activities which could be viewed as negligent or fraudulent. The concept of being a fiduciary can be difficult to fully understand. Certainly, it can be hard to see the distinction between the duties owed to the association versus those owed to the members. Always questioning whether you are or should be acting in a fiduciary capacity (you probably are!) will be to everyone’s benefit.
[1] This is an example from another community association lawyer. The story is not from a Colorado community association lawyer, nor did it happen in Colorado, although it could absolutely take place anywhere.
