Condo Connection - DUTY of CARE

Board members are bound, at minimum, by a duty of care. Some state statutes go further to require a fiduciary duty.

Ken Harer's Condo Law Handbook provides an thorough introduction with multiple legal references:

Board Members and officers of Common Interest Communities owe a duty of care to their Associations and to individual Owners. They owe a lesser duty of care to members of the public. An Association can be held liable if its Board Members breach their duty, but courts avoid holding a Board Member personally liable unless the member engages in intentional misconduct, self-dealing, or otherwise operates in bad faith.

While the governing statutes and at least one Washington Supreme Court case imply that Board members are protected from liability from innocent mistakes and errors of judgment, the duty imposed by statute still requires that decisions and the exercise of discretion be “reasonable.” Board member actions are likely to be considered unreasonable and in breach of the duty of care if Board members fail to adequately investigate before acting or make decisions based on inaccurate or unreliable information.

In any negligence action, the plaintiff must establish that the defendant owed a duty of care and breached that duty. Atherton Condo Apartment-Owners Ass'n Bd. of Dir. v. Blume Dev. Co., 115 Wn.2d 506, 528, 799 P.2d 250 (1990). The determination of the existence of a duty is a question of law...

If you'd like to know more about duty of care, you might enjoy reading the landmark court case Riss v. Angel which was ultimately decided by the Washington State Supreme Court, as well as the 2020 WA appellate court and 2022 WA supreme court decisions in Bangerter v. Hat Island Community Association .

Discretion is not reasonably exercised when:

the procedures laid out in the governing documents and relevant statutes are not followed

the information used in the decision-making process is not reasonably accurate

Courts do not owe deference to an association's interpretation of its governing documents, but courts do owe appropriate deference to an association's reasonable discretionary decisions.

Riss suggests that when a [CIC] makes a discretionary decision in a procedurally valid way, courts will not substitute their judgment for that of the association absent a showing of "fraud, dishonesty, or incompetence (i.e., failure to exercise proper care, skill, and diligence). Reasonable care is required."

Board members are expected to conduct their actions in an ethical manner, making decisions based on reasonable discretion observing applicable statutes, governing documents, and established processes. Eschewing a principled approach for a 'make-it-up-as-we-go' and/or 'what's most popular?' line of reasoning is unlikely to promote the best interests of your community.

In Washington State, the Nonprofit Corporations Act (RCW 24.03A) includes the certain standards of conduct that exceed the obligation of good faith required by RCW 64.34.090 and 64.34.308 and WUCIOA statutes 64.90.055 and 64.90.410. These nonprofit corporation standards are also known colloquially as the " business judgment rule."

The supreme court said that the scope of the business judgment rule in Washington was somewhat unclear, and the supreme court declined to rule on whether the business judgment rule applied to corporations or only individuals.

Learn more about duty of care by reading the following:

Riss v. Angel (a landmark case related to duty of care)
Follow your North Star
Legal Lessons & Disclosure Requirements
Recommended "Do's & Don'ts"
There's Only One Sandbox: EVERYONE Gets a Shovel
WEB SEARCH: Duty of Care

WA Nonprofit Corporation Standards of Conduct

RCW 24.03A.495 — Standards of Conduct for Directors

(1) Each director, when discharging the duties of a director, shall act:

(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 reasonably believes to be in the best interests of the nonprofit corporation.

(2) In discharging board or committee duties a director shall disclose, or cause to be disclosed, to the other board or committee members information not already known by them but known by the director to be material to the discharge of their decision-making or oversight functions, except that disclosure is not required to the extent that the director reasonably believes that doing so would violate a duty imposed by law, a legally enforceable obligation of confidentiality, or a professional ethics rule.

(3) In discharging the duties of a director, a director may rely on information, opinions, reports, or statements, including financial statements or other financial data, if prepared or presented by:

One or more officers, employees, or volunteers of the nonprofit corporation whom the director reasonably believes to be reliable and competent in the functions performed or the matters presented;

Legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the director reasonably believes are matters:

Within the particular person's professional or expert competence; or

As to which the particular person merits confidence; or

A committee of the board of which the director is not a member, designated in accordance with provisions of the articles or bylaws, as to matters within its designated authority, if the director reasonably believes the committee merits confidence.

(4) A director is not a trustee with respect to the nonprofit corporation or with respect to any property held or administered by the corporation, including property that may be subject to restrictions imposed by the donor or transferor of the property.

RCW 24.06.153 — Duties of director or officer—Standards—Liability

(1) A director shall discharge the duties of a director, including duties as a member of a committee, and an 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 corporation.

(2) In discharging the duties of a director or an officer, 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:

One or more officers or employees of the corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented; or

Legal counsel, public accountants, or other persons as to matters the director or officer reasonably believes are within the person's professional or expert competence.

In addition, a director is entitled to rely on a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.

(3) A director or an officer is not acting in good faith if the director or officer has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) of this section unwarranted.

(4) A director or officer is not liable for any action taken as a director or as an officer, or any failure to take any action, if the director or officer performed the duties of the director's or officer's office in compliance with this section.

WA Nonprofit Corporation Conflicts of Interest

RCW 24.03A.615 — Conflicting Interest Transactions — Voidability

(1) A contract or transaction between a nonprofit corporation and one or more of its members, directors, or officers; or between a nonprofit corporation and any other entity in which one or more of its directors or officers are directors or officers, hold a similar position, or have a financial interest is not void or voidable solely for that reason, or solely because the member, director, or officer is present at or participates in the meeting of the board that authorizes the contract or transaction or solely because his or her or their votes are counted for that purpose, if:

The material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the board and the board in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors even though the disinterested directors are less than a quorum;

The material facts as to the relationship or interest of the member, director, or officer and as to the contract or transaction are disclosed or are known to the members entitled to vote thereon, if any, and the contract or transaction is specifically approved in good faith by vote of those members; or

The contract or transaction is fair as to the corporation as of the time the board or the members authorize, approve, or ratify the transaction.

(2) Interested directors or directors holding a similar position in the other entity involved in a contract or transaction specified in subsection (1) of this section may be counted in determining the presence of a quorum at a meeting of the board that authorizes the contract or transaction.

(3) This section is applicable except as provided in the articles or bylaws.

N.B RCW 24.06 does not contain any conflict of interest provisions. This is unfortunate as 64.90.410 directly references RCW 24.06.

WA Nonprofit Corporation Liability of Directors

RCW 24.06.035 — Nonprofit Status — Members', Officers' Immunity from Liability

(1) A corporation subject to the provisions of this chapter shall not engage in any business, trade, a vocation or profession for profit: PROVIDED, That nothing contained herein shall be construed to forbid such a corporation from accumulating reserve, equity, surplus or other funds through subscriptions, fees, dues or assessments, or from charges made its members or other persons for services rendered or supplies or benefits furnished, or from distributing its surplus funds to its members, stockholders or other persons in accordance with the provisions of the articles of incorporation. A member of the board of directors or an officer of such a corporation shall have the same immunity from liability as is granted in RCW 4.24.264.

(2) Unless the articles of incorporation provide otherwise, a member of the board of directors or an officer of the corporation is not individually liable to the corporation or its shareholders or members in their capacity as shareholders or members for conduct within his or her official capacity as a director or officer after July 22, 2001, except for acts or omissions that involve intentional misconduct or a knowing violation of the law, or that involve a transaction from which the director or officer will personally receive a benefit in money, property, or services to which the director or officer is not legally entitled. Nothing in this subsection may be construed to limit or modify in any manner the power of the attorney general to bring an action on behalf of the public to enjoin, correct, or otherwise remedy a breach of a charitable trust by a corporation or its directors or officers.

RCW 4.24.264 — Boards of Directors or Officers of Nonprofit Corporations — Liability — Limitations

(1) Except as provided in subsection (2) of this section, a member of the board of directors or an officer of any nonprofit corporation is not individually liable for any discretionary decision or failure to make a discretionary decision within his or her official capacity as director or officer unless the decision or failure to decide constitutes gross negligence.

(2) Nothing in this section shall limit or modify in any manner the duties or liabilities of a director or officer of a corporation to the corporation or the corporation's members.

RCW 24.03A.540 — Liability of Directors

(1) A director of a nonprofit corporation is not liable to the nonprofit corporation for any action taken, or any failure to take any action, as a director, except as provided in subsection (2) or (3) of this section or in the articles or bylaws.

(2) Notwithstanding any provision to the contrary in the articles or bylaws, a director is liable to the corporation for:

The value of any benefit in cash, other property, or services received by the director to which the director is not legally entitled; or

Intentional misconduct or a knowing violation of law, including but not limited to criminal law or this chapter, by the director.

(3) A director is liable to the corporation for a violation of any additional standard of conduct specified in the nonprofit corporation's articles as an exception to the limitation on [the] director's liability.

(4) A director of a nonprofit corporation is not liable to any member of the nonprofit corporation for any action taken, or any failure to take action, as a director, except as provided in subsection (5) of this section.

(5) A director is liable to a member of the corporation only for:

A knowing infliction of harm upon the member; or

An intentional violation of criminal law or this chapter that results in harm or loss to the member.

(6) The party seeking to establish the director's liability to the corporation or any member of the corporation:

For money damages, also has the burden of establishing that:

Harm to the nonprofit corporation or its members has been suffered; and

The harm suffered was proximately caused by the director's challenged conduct; or

For other money payment under a legal remedy, such as compensation for the unauthorized use of corporate assets, also has whatever burden of persuasion may be called for to establish that the payment sought is appropriate in the circumstances; or

For other money payment under an equitable remedy, such as profit recovery by or disgorgement to the corporation, also has whatever burden of persuasion may be called for to establish that the equitable remedy sought is appropriate in the circumstances.

(7) Nothing contained in this section:

In any instance where fairness is at issue, such as consideration of the fairness of a transaction to the nonprofit corporation under RCW 24.03A.615(1)(c), alters the burden of proving the fact or lack of fairness otherwise applicable;

Alters the fact or lack of liability of a director to the nonprofit corporation under another section of this chapter, such as the provisions governing the consequences of an unlawful distribution under RCW 24.03A.610 a conflicting interest transaction under RCW 24.03A.615, or taking advantage of a business opportunity under RCW 24.03A.620;

Affects any rights to which the corporation or a director or member may be entitled under another statute of this state or the United States; or

Affects the authority of the attorney general to take any action against a director under this chapter or other applicable Washington state law.

WA CIC Liability of Directors

RCW 64.34.276(3) — Master Associations

(3) If the declaration of any condominium provides that the board of directors may delegate certain powers to a master association, the members of the board of directors have no liability for the acts or omissions of the master association with respect to those powers following delegation.

RCW 64.34.278(3) — Delegation of Power to Subassociations

(3) If the declaration of any condominium contains a delegation of certain powers to a subassociation, or provides that the board of directors of the condominium may make such a delegation, the members of the board of directors have no liability for the acts or omissions of the subassociation with respect to those powers so exercised by the subassociation following delegation.

RCW 64.90.560 — Reserve Account and Reserve Study Liability RCW 64.34.390 — Reserve Account and Reserve Study Liability RCW 64.38.085 — Reserve Account and Reserve Study Liability

Except for an award for attorneys' fees and costs under RCW 64.90.555(2), monetary damages or other liability may not be awarded against or imposed upon the association or its officers or board members, or upon any person who may have provided advice or assistance to the association or its officers or board members, for failure to: Establish or replenish a reserve account, have a current reserve study prepared or updated in accordance with the requirements of this chapter, or make reserve disclosures in accordance with this chapter.

Monetary damages or any other liability may not be awarded against or imposed upon the association, the officers or board of directors of the association, or those persons who may have provided advice or assistance to the association or its officers or directors, for failure to: Establish a reserve account; have a current reserve study prepared or updated in accordance with RCW 64.34.380 through 64.34.388; or make the reserve disclosures in accordance with RCW 64.34.382 and 64.34.410(1)(oo) and *64.34.425(1)(s).

Monetary damages or any other liability may not be awarded against or imposed upon the association, the officers or board of directors of the association, or those persons who may have provided advice or assistance to the association or its officers or directors, for failure to: Establish a reserve account; have a current reserve study prepared or updated in accordance with the requirements of this chapter; or make the reserve disclosures in accordance with this chapter.

RCW 64.90.405(2) — Powers and Duties RCW 64.34.304(1)(m) — Unit Owners' Association Powers

(2) Except as provided otherwise in subsection (4) of this section and subject to the provisions of the declaration, the association may:

Provide for the indemnification of its officers and board members, to the extent provided in RCW 23B.17.030;

Maintain directors' and officers' liability insurance;

(m) Provide for the indemnification of its officers and board of directors and maintain directors' and officers' liability insurance;

RCW 24.03A.100 — Articles of incorporation

(2) The articles of incorporation may set forth:

A provision permitting or making obligatory indemnification of any individual made a party to a proceeding because the individual is or was a director against liability incurred in the proceeding, subject to the limitations set forth in RCW 24.03A.630;

RCW 24.03A.630 — Indemnification and advance for expenses

The provisions of RCW 23B.08.500 through 23B.08.603, or their successors, apply to any corporation to which this chapter applies. For purposes of this chapter:

(5) This section does not limit a nonprofit corporation's power to indemnify, advance expenses to, or provide or maintain insurance on behalf of an employee, agent, or volunteer.

RCW 23B.17.030 — Limitation on liability of directors —Indemnification

The provisions of RCW 23B.08.320 and 23B.08.500 through 23B.08.600 shall apply to any corporation, other than a municipal corporation, incorporated under the laws of the state of Washington.

RCW 23B.08.520 — Mandatory indemnification

Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because of being a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding.

RCW 23B.08.603 — Indemnification or advance for expenses—Later amendment or repeal of subject provision

The right of a director, officer, employee, or agent to indemnify or to advancement of expenses arising under a provision in the articles of incorporation or a bylaw shall not be eliminated or impaired by an amendment to or repeal of that provision after the occurrence of the act or omission that is the subject of the proceeding for which indemnification or advancement of expenses under that provision is sought, unless the provision in effect at the time of such an act or omission explicitly authorizes the elimination or impairment of the right after such an action or omission has occurred.

WA CIC Obligation of Good Faith

RCW 64.34.090 & 64.90.055 — Obligation of Good Faith

Every contract or duty governed by this chapter imposes an obligation of good faith in its performance or enforcement.

RCW 64.34.308 — Board of Directors and Officers

(1) Except as provided in the declaration, the bylaws, subsection (2) of this section, or other provisions of this chapter, the board of directors shall act in all instances on behalf of the association. In the performance of their duties, the officers and members of the board of directors are required to exercise: (a) If appointed by the declarant, the care required of fiduciaries of the unit owners; or (b) if elected by the unit owners, ordinary and reasonable care.

RCW 64.90.410 — Board Members, Officers & Committees

(1)(a) Except as provided otherwise in the governing documents, subsection (4) of this section, or other provisions of this chapter, the board may act on behalf of the association.

(b) In the performance of their duties, officers and board members must exercise the degree of care and loyalty to the association required of an officer or director of a corporation organized, are subject to the conflict of interest rules governing directors and officers, and are entitled to the immunities from liability available to officers and directors under chapter 24.06 RCW. The standards of care and loyalty, and conflict of interest rules and immunities described in this section apply regardless of the form in which the association is organized.

ETHICS