Duty of Care

In many states, nonprofit board members are bound, at minimum, by a duty of care. Some state statues 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.

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:

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

  2. 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 statues, 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 judgement 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.

If you'd like to know more about duty of care, you might enjoy:

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:

(a) 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;

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

(i) Within the particular person's professional or expert competence; or

(ii) As to which the particular person merits confidence; or

(c) 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.

WA Nonprofit Corporation Liability of Directors

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:

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

(b) 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) A knowing infliction of harm upon the member; or

(b) 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:

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

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

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

(b) 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

(c) 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:

(a) 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;

(b) 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;

(c) 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

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