Director Fiduciary Duties

Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com

Several courts have recognized that the broad and extensive powers of association boards come with the potential for abuse, and that directors are obligated to persons other than holders of the majority voting power and should be held to a high standard of responsibility. A premise with which many boards struggle is the duty to act in good faith and avoid arbitrary decisions — including so-called emergency decisions.

Failure of these directors to adequately police and supervise the manager creates an incentive for management to take liberties with board positions, removing disincentives to act legitimately. You must differentiate yourself from those recalcitrant directors.

It is a huge breach of contractual and fiduciary duties for a manager to receive payment for approving certain vendors. It is a bigger breach of the directors’ fiduciary duties to forgo obligations to titleholders whose personal assets are at risk under an umbrella of possible corruption. Managers owe the association, board and owners a duty of loyalty, which includes an obligation to prevent transactions like these from occurring.

The board’s duty is to act in accordance with principles of sound corporate governance. The second your manager suggested that board “protocol” is for directors to remove themselves from selecting vendors who are paid with association funds, your board should have started looking for a new manager.

When a manager induces a board to breach its duties and prevent bona fide vendors from presenting bids for projects, she acts not as a manager in upholding the association’s best interests, but rather as an adversary or competitor. Boards have no legitimate reason to allow themselves to be pushed around by a manager; she works for you, and she can be terminated by you.

Directors should not only bring in bids, they must actively engage in the vetting process for new vendors and continually review the work and reports of existing vendors. Sure, it takes a little effort and some time, but it benefits the entire association. That’s why you were elected. Protecting association assets is paramount to the position of board director. The board must maximize efficiencies while minimizing costs. This sometimes requires reviewing and re-reviewing decisions that were previously made, even by prior boards, to determine whether better or more efficient alternatives are now available.

Tittering while anyone is speaking is extremely rude. In addition to being unprofessional, encouraging tittering during board meetings, then branding you a troublemaker, interferes with the business of the association. More distressing are the actions of your tittering board directors whose abject failure to take appropriate measures against management exposes them to civil liability. Titleholders need to attend meetings and view these actions for themselves, then consider options against the board for breach of fiduciary duty and failure to supervise vendors.