Community associations are nonprofit corporations, governed by the North Carolina Nonprofit Corporation Act.
The law provides that nonprofit corporations, including community associations, must "act" through their board of directors. The board of directors is (typically) made up of community members who volunteer to serve as directors and are elected by the association's membership. Even though the directors are volunteers, they still owe the association certain fiduciary duties. It is important for directors to have an awareness and a fundamental understanding of these duties.
Regardless of the type of community association, North Carolina law provides that a director shall discharge their duties to the association in good faith, with due care, and with loyalty. These duties are to be discharged with the level of care that an ordinary prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the best interests of the association.
Duty of Good Faith
The duty of good faith requires a director to discharge the responsibilities of the office of director honestly, conscientiously, and fairly. In other words, the director must make decisions that are in the best interests of the association and not for the benefit of specific individuals or groups.
For example, if a community member serves as a director on the board of two different associations within the same subdivision—such as a master-sub association relationship. Depending on the interactions between the two associations, an individual may have difficulty navigating their responsibility to act with good faith and in the best interest of both associations simultaneously. Accordingly, it generally is best practices to only serve on one community association board at a time, particularly in the same subdivision.
Duty of Due Care
The duty of due care places the affirmative obligation on directors to direct and supervise the affairs of the association with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The duty of due care requires that directors make reasonable inquiries to inform themselves as to conditions of the association and the conduct of its affairs.
Importantly, the duty of due care does not expect directors to have the personal knowledge to expertly oversee, research, and manage every issue that a community association may face. Instead, directors should rely on information, opinions, reports, or statements, including financial statements and other financial data prepared or presented by:
- One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
- Legal counsel, public accountants, engineers, architects, or other persons as to matters the director reasonably believes are within their professional or expert competence; or
- A committee of the board of which the director is not a member if the director reasonably believes the committee merits confidence.
However, a director may not rely on information, opinions, reports, or statements of a third-party if the director has actual knowledge concerning the matter in question that makes reliance unwarranted.
Duty of Loyalty
The duty of loyalty requires directors to act in a manner that the director reasonably believes to be in the best interest of the association. The duty of loyalty prohibits directors from using their position as a director for personal gain or to the detriment of the association. It is important to note that unless the community association is a condominium, the board member's fiduciary duties do not run directly to the members of the association, simply to the association itself. This is an important distinction, as sometimes the board will make decisions that are contrary to the best interests of the members, but which are in the best interest of the association.
Conclusion
Serving on a community association board of directors can be very rewarding, but it is important for all potential board members to understand that serving as a board member comes with responsibilities that should not be taken lightly. Directors are subject to several responsibilities and duties and must carry out those responsibilities and duties while navigating the unique needs and challenges of their community. Failing to do so has the potential to open up the director to individual personal liability, but our expert community association attorneys are ready to assist when the need arises.
