Directors' Potential Liability for Unauthorized Acts
by Martin L. Lee, Esq.

Directors in homeowners associations often feel as if they have the power and authority to make general business decisions similar to officers in normal business corporations; and in many cases they do. Where directors in homeowners associations need to be careful (and where an important distinction exists relative to other corporations) is in adhering to the restraint on their powers which does not exist in normal corporations; to wit, in the declaration of CC&Rs. Homeowners associations are like other corporations in that they have Bylaws and Articles of Incorporation. But only homeowners associations have declarations of CC&Rs - other kinds of corporations do not. And so, where the officers of a normal business corporation may, for example, decide to pay for a business Christmas party or wash the windows of its employees' offices, the directors of a homeowners association may not make such decisions unless the specific power to do so exists in the declaration of CC&Rs.

The law analogizes directors in homeowners associations as trustees whose exercise of power is limited by the declaration of CC&Rs. A trustee is a fiduciary who may be individually and personally liable for any breaches of his or her fiduciary duty. The declaration of CC&Rs is also thereby analogized to the trust declaration in a normal trust situation. And just as a trustee in a normal trust may not decide to do anything with the trust corpus unless the authority therefor is in the trust declaration, neither may the directors in a homeowners association decide to do anything with homeowner assessment monies (i.e., the "trust corpus") other than what is specifically provided for in the declaration of CC&Rs (the "trust declaration").

A violation by the directors of limitations on their authority set forth expressly or impliedly in the declaration of CC&Rs can result in those directors becoming personally and individually liable to association members for, inter alia, the breach of their fiduciary duty - this is analogous to the liability of a trustee. And so, unless specific authority exists in the declaration of CC&Rs, the directors in a homeowners association may not use common monies to pay, for example, for parties, the repair and/or maintenance of anything which benefits individual association members, or to do anything else which sounds nice, unless the CC&Rs specifically permit same. The risk which a director runs in violating these restraints is one of individual and/or personal liability. In any situation where doubt exists whether a specific expenditure is or is not permitted under the association's declaration of CC&Rs, competent legal counsel should be consulted and the advice of such counsel in this regard should be followed.