Quote from Andy Mowery on November 1, 2019, 2:33 pm
During my tenure of service, my fellow board members brought up the word "duty" in only one phrase and context - fiduciary duty. Walker, acting as an informal legal advisor, repeatedly warned the rest of the board that if we didn't do this or that (when proposing an enforcement action), that would be violating our fiduciary duty.
For novices, which is a fair description of the entire board, regardless of prior service elsewhere, this sounded scary. Because, the follow-up question to this is - OK, what happens if we violate our fiduciary duty?
The vague answer: lawsuits. And, nobody wants lawsuits, right?
With such a loose framework, the haunting shadow of the Fiduciary Duty Boogieman meant that anyone who suggested something different was often confronted with the concept that inaction, or inconsistency in action, would result in some hypothetical owner in our community filing a lawsuit against the board, or individual board members for violating "fiduciary duty". Therefore, Walker, and his ideological partner, Irve, would repeatedly browbeat their fellow boardmembers on this point. No one wanted to be the one who attracted a lawsuit. And, so we went along with their theory of "duty" for most of 2018.
But, as each enforcement action became more questionable, the logic was stretched to the breaking point. According to Walker and Irve, they emphasized this logic:
A. Any rule that appears in the governing documents must be enforced, open to opinionated interpretation by the sitting board. B. If the rule is not enforced, then other homeowners suffer a decreased home value, without any requirement to demonstrate factually that such a cause-effect relationship actually exists. C. If a rule is not enforced on one party, it precluded enforcement on any other party for sake of the value of "consistency". Therefore, circumstances and variances should not be allowed. D. If a homeowner perceives a loss in home value to to a failure by the board to enforce a rule, or enforce it consistently, the board is guilty of violating their fiduciary duty, and becomes liable (which then creates expense for the HOA and homeowners) as a board, and perhaps individually.
The problem with this logic is that it is undermined by not only the more complete set of duties, but also by our own governing documents. In fact, the issue of "consistency" is in black and white in CCR Article IX Section 6 No Waiver of Future Approval:
So, clearly, the entire concept impressed upon the 2018 Board by Walker and Irve, that if we demonstrated any type of higher thinking to permit, for instance, a temporary fence for a family who is watching their daughter's dog while she gets medical treatments, a slightly-taller fence to keep a rogue dog from escaping a yard regularly, some children to keep pet ducks in their backyard, or even having owners display a welcome sign in arabic/spanish, that, in fact, none of the approvals of such variances would create a legal liability based upon their interpretation or impression of the so-called fiduciary duty.
Do not get me wrong: Fiduciary Duty is a real thing, and it is a serious consideration for anyone serving on the board. But, it's not the rigid boogieman portrayed by Walker and Irve, and it certainly doesn't invite lawsuits when the underlying intention behind approving a variance is inherent kindness, not to mention common sense and logic.
So, where does a Board Member who does wish to do their job diligently or correctly go for objective guidance on the matter? Colorado Statutes? The governing documents? An attorney?
The underlying problem is that CCIOA is far to vague to give a good faith board member detailed instructions on what duties they should follow. They would have to dig deeper, and both read legal opinions expressed in various HOA websites (tailored to Colorado's laws), as well as have a basic understanding of what is called the Business Judgment Rule. This Rule is actually derived from examination of Colorado case law, which, in turn relies upon a 1969 Colorado Supreme Court ruling.
Interestingly, when I discovered this to be the dynamic, I brought it up at a meeting on 11/20/19. Irve tried, at the meeting, to mischaracterize my attribution as an intent to take every issue that arises to the Colorado Supreme Court, which was absurd and ridiculous to even say out loud. But, after the meeting, he told me directly that if he was required to have to spend time looking up legal cases and the law, then he was uninterested in being a Board member. Less than 30 days later, he abruptly resigned.
So, the Business Judgement Rule is defined partially by the Non-Profit Act:
7-128-401. General standards of conduct for directors and officers
(1) Each director shall discharge the director’s duties as a director, including the director’s duties as a member of a committee of the board, and each officer with discretionary authority shall discharge the officer’s duties under that authority: (a) In good faith; (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) In a manner the director or officer reasonably believes to be in the best interests of the nonprofit corporation.
(2) In discharging duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One or more officers or employees of the nonprofit corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented; (b) Legal counsel, a public accountant, or another person as to matters the director or officer reasonably believes are within such person’s professional or expert competence; (c) Religious authorities . . . ; or (d) In the case of a director, a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
This, of course, is extremely vague, which, in turn, is very helpful for boards or individual board of directors who wish to defend themselves from accusations of violations of fiduciary duty. So, one website (Colorado Homeowners Association Law) offers additional guidance:
How will a court likely consider a board decision if challenged by members of the association? In Colorado, the courts often apply the Business Judgment Rule when evaluating board decisions. The Business Judgment Rule serves as a defense for directors. To prevail when using the Business Judgment Rule as a defense, a board of directors must show that it acted in good faith, in a way that was reasonable under the circumstances and that was not arbitrary or capricious. When applying the Business Judgment Rule, a court recognizes that board members must make decisions based on the information available at the time the decision-making occurs; accordingly, courts generally refuse to interfere with honest business decisions through the benefit of hindsight. The Business Judgment Rule will not apply when the board failed to make a decision on a matter. It also will not benefit directors who hold an interest in the matter decided upon by the board or who otherwise act improperly or outside the scope of their authority as directors. Does Colorado law allow nonprofit corporations to protect their board members from liability if a challenge occurs? Yes. Colorado statutes offer protections to nonprofit corporation directors and officers by allowing the corporate articles of incorporation or bylaws to eliminate or limit the personal liability of a director to the nonprofit corporation or to its members for monetary damages resulting from a director’s breach of fiduciary duty. Corporate protections for board members also come in the form of directors’ and officers’ liability insurance, indemnification provisions in the governing documents, and sound business practices. What types of director actions do not receive protection by statute or in corporate documents? Colorado statutes state that a nonprofit corporation’s corporate documents cannot eliminate or limit the personal liability of a director for the following: (a) monetary damages for any breach of the director’s duty of loyalty to the nonprofit corporation or to its members; (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) unlawful distributions of the corporate assets, including loaning corporate funds to a director or officer; or (d) any transaction from which the director directly or indirectly derived an improper personal benefit.
So, at the very end of that quote, there's an interesting clause for the Business Judgment Rule. Ignorance of the law WORKS as an affirmative defense against breach of fiduciary duty lawsuits. It's literally a Mulligan Law, which seems absurd on it's face. However, recognizing that HOA Boards are often volunteers and not licensed professionals, being able to say "but we were trying to do a good job", does, in fact, insulate the individuals and board from liability. But, only the first time.
Once it can be demonstrated that the board member had actual knowledge of the law or violation of a law (or governing documents), that affirmative defense vaporizes, and the case becomes one of determining whether actions were "wanton and willful". This is why, by the way, I personally spent time writing LONG emails to the 2018/19 Board - to ensure that the excuses of "but, we weren't aware" wasn't valid. If you'll note the Recall Committee's written grievances, that was, in fact, the excuse used by the removed board, and it was factually untrue that they stopped the pattern of non-compliance with statutes and governing documents upon receiving notice. What they did instead was to engage in ad hominem attacks against the whistleblower, and then a campaign to cover-up the documentation by removing all evidence from the HOA website.
The problem, however, in addressing this general governance problem (how to educate board members, so that they know what their actual duties are) is that the information is scattered piecemeal across statutes, the governing documents, and in legal website attempting to educate board members. The Colorado State Legislature knows this, and in the 2019 Stakeholder program, they have struggled with whether or not to have licensing or standards enforced by a regulatory body - and they are choosing the latter at the time of this writing.
As an example, one of the lesser-known duties of a Board of Director member is to share all information with all other board members. In order to find this duty, they would need to dig into CCIOA to find this:
“Notwithstanding any provision of the declaration or bylaws to the contrary, all members of the executive board shall have available to them all information related to the responsibilities and operation of the association obtained by any other member of the executive board. This information shall include, but is not necessarily limited to, reports of detailed monthly expenditures, contracts to which the association is a party, and copies of communications, reports and opinions to and from any member of the executive board or managing agent, attorney, or accountant employed or engaged by the executives board to whom the executive board delegates responsibilities under this article.” (emphasis supplied)
This was relevant to our experience in Poudre Overlook. I attempted to get the information shared by Irve Denenberg, Walker Flanary, and Pete Dauster in their October 24, 2018 meeting. Neither Irve nor Walker were responsive to requests for documentation of the meeting, and neither would explain what advice they received upon request. But, then, upon Maryann and Walker taking advantage of a meeting in which two board members weren't in attendance to make themselves President and Vice President, the next day they sent an email to Pete ordering him to refuse any communications from any other Board members without their authority.
This action was a direct and clear violation of the Duty to Act within Scope of Authority. And, it was a violation of CRS 38-33.3-303(1)(b)
Upon giving them notice of this violation, as well as the board in general, we started to see some board members resign over the tension (Heather), and then we ultimately saw Pete Dauster terminate the relationship. And, my contention is that Pete recognized the legal liability created, and that he was a witness to the misrepresentation and dishonesty. So, he chose to follow Federal Rule 3.7 and recuse himself on the matter.
So, seeking out a comprehensive list, I found that there really isn't one. The state doesn't have a list of Board member duties, and even legal advice websites were fragmented, only giving an insight here or there. The best examples I found was on Colorado Homeowners Association Law and another at Orten Cavanagh & Holmes LLC:
Between these two websites, we can piece together a short list of potential duties for our community to consider institutionalizing as part of a code of conduct. I think it's also a great idea to have all Board members agree in writing to adhere to such a list of duties.
Duty of Care
Duty of Loyalty (or Undivided Loyalty)
Duty to Act within the Scope of Authority
Duty to Share All Relevant Information
Duty of Confidentiality
Duty to Avoid Improper Conflicts of Interest
Duty to Avoid Intentional Misconduct and Knowing Violations of the Law
Duty to Avoid Unlawful Distributions of Association Assets
Duty to Avoid Loans from the Association to a Director
Duty To to Not Appropriate a Corporate Opportunity
While I do believe, after interactions with Colorado Legislators, there is an intention to create such a list and codify it into statute, we cannot wait for such action. We are within our authority to develop a written set of duties for our Board, and to oblige them to commit to them at the beginning of their term of service (or mid-term, if necessary).
I have raised this issue with the current board, and believe more community input is necessary, as well as additional research, not to mention legal counsel advice. I've also reached out to other HOAs to see if there's a pattern to follow, and my initial impression is that other HOAs who have had to confront bad faith actors have used the simple application of policy as the means to get there. It doesn't require an expensive endeavor to rewrite the bylaws or covenants. We can accomplish filling the void with policy, and address the vast majority of situations.
What we can't allow any further is for amateurs to guess as to their duties, and apply their opinions with nothing more than the backing of a board majority. If there is anything that will not only attract litigation, but create actual liability, it's allowing this to be decided by uniformed persons who refuse to even bother to look up the law, let alone research the expert advice that exists and is readily available.
As we consider any new board members, as well as those serving, the topic of fitness for duty needs to be prioritized. And, as I've written about previously, those that display willful and wanton actions ignoring such duties, should be considered for barring action against future service. We cannot have board members who do not respect the necessity to be informed about all of their duties, not just their absurd notions of fiduciary duty. And, given the harm done to many owners already, I'd rate this priority as urgent.
During my tenure of service, my fellow board members brought up the word "duty" in only one phrase and context - fiduciary duty. Walker, acting as an informal legal advisor, repeatedly warned the rest of the board that if we didn't do this or that (when proposing an enforcement action), that would be violating our fiduciary duty.
For novices, which is a fair description of the entire board, regardless of prior service elsewhere, this sounded scary. Because, the follow-up question to this is - OK, what happens if we violate our fiduciary duty?
The vague answer: lawsuits. And, nobody wants lawsuits, right?
With such a loose framework, the haunting shadow of the Fiduciary Duty Boogieman meant that anyone who suggested something different was often confronted with the concept that inaction, or inconsistency in action, would result in some hypothetical owner in our community filing a lawsuit against the board, or individual board members for violating "fiduciary duty". Therefore, Walker, and his ideological partner, Irve, would repeatedly browbeat their fellow boardmembers on this point. No one wanted to be the one who attracted a lawsuit. And, so we went along with their theory of "duty" for most of 2018.
But, as each enforcement action became more questionable, the logic was stretched to the breaking point. According to Walker and Irve, they emphasized this logic:
A. Any rule that appears in the governing documents must be enforced, open to opinionated interpretation by the sitting board. B. If the rule is not enforced, then other homeowners suffer a decreased home value, without any requirement to demonstrate factually that such a cause-effect relationship actually exists. C. If a rule is not enforced on one party, it precluded enforcement on any other party for sake of the value of "consistency". Therefore, circumstances and variances should not be allowed. D. If a homeowner perceives a loss in home value to to a failure by the board to enforce a rule, or enforce it consistently, the board is guilty of violating their fiduciary duty, and becomes liable (which then creates expense for the HOA and homeowners) as a board, and perhaps individually.
The problem with this logic is that it is undermined by not only the more complete set of duties, but also by our own governing documents. In fact, the issue of "consistency" is in black and white in CCR Article IX Section 6 No Waiver of Future Approval:
So, clearly, the entire concept impressed upon the 2018 Board by Walker and Irve, that if we demonstrated any type of higher thinking to permit, for instance, a temporary fence for a family who is watching their daughter's dog while she gets medical treatments, a slightly-taller fence to keep a rogue dog from escaping a yard regularly, some children to keep pet ducks in their backyard, or even having owners display a welcome sign in arabic/spanish, that, in fact, none of the approvals of such variances would create a legal liability based upon their interpretation or impression of the so-called fiduciary duty.
Do not get me wrong: Fiduciary Duty is a real thing, and it is a serious consideration for anyone serving on the board. But, it's not the rigid boogieman portrayed by Walker and Irve, and it certainly doesn't invite lawsuits when the underlying intention behind approving a variance is inherent kindness, not to mention common sense and logic.
So, where does a Board Member who does wish to do their job diligently or correctly go for objective guidance on the matter? Colorado Statutes? The governing documents? An attorney?
The underlying problem is that CCIOA is far to vague to give a good faith board member detailed instructions on what duties they should follow. They would have to dig deeper, and both read legal opinions expressed in various HOA websites (tailored to Colorado's laws), as well as have a basic understanding of what is called the Business Judgment Rule. This Rule is actually derived from examination of Colorado case law, which, in turn relies upon a 1969 Colorado Supreme Court ruling.
Interestingly, when I discovered this to be the dynamic, I brought it up at a meeting on 11/20/19. Irve tried, at the meeting, to mischaracterize my attribution as an intent to take every issue that arises to the Colorado Supreme Court, which was absurd and ridiculous to even say out loud. But, after the meeting, he told me directly that if he was required to have to spend time looking up legal cases and the law, then he was uninterested in being a Board member. Less than 30 days later, he abruptly resigned.
So, the Business Judgement Rule is defined partially by the Non-Profit Act:
7-128-401. General standards of conduct for directors and officers
(1) Each director shall discharge the director’s duties as a director, including the director’s duties as a member of a committee of the board, and each officer with discretionary authority shall discharge the officer’s duties under that authority: (a) In good faith; (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) In a manner the director or officer reasonably believes to be in the best interests of the nonprofit corporation.
(2) In discharging duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One or more officers or employees of the nonprofit corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented; (b) Legal counsel, a public accountant, or another person as to matters the director or officer reasonably believes are within such person’s professional or expert competence; (c) Religious authorities . . . ; or (d) In the case of a director, a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
This, of course, is extremely vague, which, in turn, is very helpful for boards or individual board of directors who wish to defend themselves from accusations of violations of fiduciary duty. So, one website (Colorado Homeowners Association Law) offers additional guidance:
How will a court likely consider a board decision if challenged by members of the association? In Colorado, the courts often apply the Business Judgment Rule when evaluating board decisions. The Business Judgment Rule serves as a defense for directors. To prevail when using the Business Judgment Rule as a defense, a board of directors must show that it acted in good faith, in a way that was reasonable under the circumstances and that was not arbitrary or capricious. When applying the Business Judgment Rule, a court recognizes that board members must make decisions based on the information available at the time the decision-making occurs; accordingly, courts generally refuse to interfere with honest business decisions through the benefit of hindsight. The Business Judgment Rule will not apply when the board failed to make a decision on a matter. It also will not benefit directors who hold an interest in the matter decided upon by the board or who otherwise act improperly or outside the scope of their authority as directors. Does Colorado law allow nonprofit corporations to protect their board members from liability if a challenge occurs? Yes. Colorado statutes offer protections to nonprofit corporation directors and officers by allowing the corporate articles of incorporation or bylaws to eliminate or limit the personal liability of a director to the nonprofit corporation or to its members for monetary damages resulting from a director’s breach of fiduciary duty. Corporate protections for board members also come in the form of directors’ and officers’ liability insurance, indemnification provisions in the governing documents, and sound business practices. What types of director actions do not receive protection by statute or in corporate documents? Colorado statutes state that a nonprofit corporation’s corporate documents cannot eliminate or limit the personal liability of a director for the following: (a) monetary damages for any breach of the director’s duty of loyalty to the nonprofit corporation or to its members; (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) unlawful distributions of the corporate assets, including loaning corporate funds to a director or officer; or (d) any transaction from which the director directly or indirectly derived an improper personal benefit.
So, at the very end of that quote, there's an interesting clause for the Business Judgment Rule. Ignorance of the law WORKS as an affirmative defense against breach of fiduciary duty lawsuits. It's literally a Mulligan Law, which seems absurd on it's face. However, recognizing that HOA Boards are often volunteers and not licensed professionals, being able to say "but we were trying to do a good job", does, in fact, insulate the individuals and board from liability. But, only the first time.
Once it can be demonstrated that the board member had actual knowledge of the law or violation of a law (or governing documents), that affirmative defense vaporizes, and the case becomes one of determining whether actions were "wanton and willful". This is why, by the way, I personally spent time writing LONG emails to the 2018/19 Board - to ensure that the excuses of "but, we weren't aware" wasn't valid. If you'll note the Recall Committee's written grievances, that was, in fact, the excuse used by the removed board, and it was factually untrue that they stopped the pattern of non-compliance with statutes and governing documents upon receiving notice. What they did instead was to engage in ad hominem attacks against the whistleblower, and then a campaign to cover-up the documentation by removing all evidence from the HOA website.
The problem, however, in addressing this general governance problem (how to educate board members, so that they know what their actual duties are) is that the information is scattered piecemeal across statutes, the governing documents, and in legal website attempting to educate board members. The Colorado State Legislature knows this, and in the 2019 Stakeholder program, they have struggled with whether or not to have licensing or standards enforced by a regulatory body - and they are choosing the latter at the time of this writing.
As an example, one of the lesser-known duties of a Board of Director member is to share all information with all other board members. In order to find this duty, they would need to dig into CCIOA to find this:
“Notwithstanding any provision of the declaration or bylaws to the contrary, all members of the executive board shall have available to them all information related to the responsibilities and operation of the association obtained by any other member of the executive board. This information shall include, but is not necessarily limited to, reports of detailed monthly expenditures, contracts to which the association is a party, and copies of communications, reports and opinions to and from any member of the executive board or managing agent, attorney, or accountant employed or engaged by the executives board to whom the executive board delegates responsibilities under this article.” (emphasis supplied)
This was relevant to our experience in Poudre Overlook. I attempted to get the information shared by Irve Denenberg, Walker Flanary, and Pete Dauster in their October 24, 2018 meeting. Neither Irve nor Walker were responsive to requests for documentation of the meeting, and neither would explain what advice they received upon request. But, then, upon Maryann and Walker taking advantage of a meeting in which two board members weren't in attendance to make themselves President and Vice President, the next day they sent an email to Pete ordering him to refuse any communications from any other Board members without their authority.
This action was a direct and clear violation of the Duty to Act within Scope of Authority. And, it was a violation of CRS 38-33.3-303(1)(b)
Upon giving them notice of this violation, as well as the board in general, we started to see some board members resign over the tension (Heather), and then we ultimately saw Pete Dauster terminate the relationship. And, my contention is that Pete recognized the legal liability created, and that he was a witness to the misrepresentation and dishonesty. So, he chose to follow Federal Rule 3.7 and recuse himself on the matter.
So, seeking out a comprehensive list, I found that there really isn't one. The state doesn't have a list of Board member duties, and even legal advice websites were fragmented, only giving an insight here or there. The best examples I found was on Colorado Homeowners Association Law and another at Orten Cavanagh & Holmes LLC:
Between these two websites, we can piece together a short list of potential duties for our community to consider institutionalizing as part of a code of conduct. I think it's also a great idea to have all Board members agree in writing to adhere to such a list of duties.
Duty of Care
Duty of Loyalty (or Undivided Loyalty)
Duty to Act within the Scope of Authority
Duty to Share All Relevant Information
Duty of Confidentiality
Duty to Avoid Improper Conflicts of Interest
Duty to Avoid Intentional Misconduct and Knowing Violations of the Law
Duty to Avoid Unlawful Distributions of Association Assets
Duty to Avoid Loans from the Association to a Director
Duty To to Not Appropriate a Corporate Opportunity
While I do believe, after interactions with Colorado Legislators, there is an intention to create such a list and codify it into statute, we cannot wait for such action. We are within our authority to develop a written set of duties for our Board, and to oblige them to commit to them at the beginning of their term of service (or mid-term, if necessary).
I have raised this issue with the current board, and believe more community input is necessary, as well as additional research, not to mention legal counsel advice. I've also reached out to other HOAs to see if there's a pattern to follow, and my initial impression is that other HOAs who have had to confront bad faith actors have used the simple application of policy as the means to get there. It doesn't require an expensive endeavor to rewrite the bylaws or covenants. We can accomplish filling the void with policy, and address the vast majority of situations.
What we can't allow any further is for amateurs to guess as to their duties, and apply their opinions with nothing more than the backing of a board majority. If there is anything that will not only attract litigation, but create actual liability, it's allowing this to be decided by uniformed persons who refuse to even bother to look up the law, let alone research the expert advice that exists and is readily available.
As we consider any new board members, as well as those serving, the topic of fitness for duty needs to be prioritized. And, as I've written about previously, those that display willful and wanton actions ignoring such duties, should be considered for barring action against future service. We cannot have board members who do not respect the necessity to be informed about all of their duties, not just their absurd notions of fiduciary duty. And, given the harm done to many owners already, I'd rate this priority as urgent.
