Homeowners’ Associations and Fiduciary Duties May Require Legal Authority Citing
When thinking about homeowners’ associations and fiduciary duties, should homeowners’ associations be held to a fiduciary standard in dealing with property owners? Arizona law is limited on the subject. In Rohde v. Beztak of Arizona, Inc., 164 Ariz. 383, 388, 793 P.2d 140, 145 (App. 1990), the homeowners made an argument for imposing fiduciary duties but apparently did not cite any legal authority. The Court wrote, “[t]he Rohdes have failed to cite any authority for the proposition that . . . the homeowners association . . . owes a fiduciary duty to a member of the association” and so the Court refused to find such a duty in that case. Saying a party cited no authority for a legal proposition may not be the same as saying there is no authority for the proposition.
Most property owners’ associations are non-profit corporations. Corporations have a fiduciary duty to shareholders. Master Records, Inc. v. Backman, 133 Ariz. 494, 652 P.2d 1017, 1020 (1982); Pioneer Annuity Life Ins. Co. by Childers v. Nat’l Equity Life Ins. Co., 159 Ariz. 148, 765 P.2d 550, 555 (Ariz.Ct.App.1988). Some courts have compared associations to non-profit corporations and have held that an association’s duty to its property owners is “akin to that of a corporation to its shareholders.” James F. O’Toole Co. v. Los Angeles Kingsbury Court Owners Ass’n, 126 Cal.App.4th 549, 553–554, 560, 23 Cal.Rptr.3d 894 (2005).
California courts have held associations to a fiduciary standard. The law is quite to the contrary. Courts around the country have repeatedly extended a fiduciary duty to homeowners associations requiring them to act in good faith toward their members. Cohen v. Kite Hill Cmty. Assn., 142 Cal. App. 3d 642, 655, 191 Cal. Rptr. 209, 217 (App. 1983); Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co., 114 Cal. App. 3d 783, 798, 171 Cal. Rptr. 334 (App. 1981) (Holding that a fiduciary duty exists among an association and the board of directors of that association). The breach of this duty can possibly lead to punitive damages against the association. See Kaye v. Mount La Jolla Homeowners Assn., 204 Cal. App. 3d 1476, 1493, 252 Cal. Rptr. 67, 77 (App. 1988).
Arizona is not California, of course. In a case that signals a trend in Arizona away from recognition of common law duties in favor of statutory rights and remedies, the Court of Appeals in TM2008 Investments, Inc. v. Procon Capital Corp., 234 Ariz. 421, 424, 323 P.3d 704, 707 (App. 2014) held that unless the members of a company create fiduciary duties in their operating agreement, there is no fiduciary duty among members of limited liability companies. Arizona has also expanded the so-called “economic loss rule” to limit common law tort claims. Cook v. Orkin Exterminating Co., Inc., 227 Ariz. 331, 334, 258 P.3d 149, 152 (App. 2011). The Arizona Court of Appeals’ recent trend away from recognizing common law torts might lead it to depart from its California counterparts in addressing association fiduciary duties.
If you have questions about your associations’ duties, contact the commercial litigation group at Udall Shumway PLC, serving Arizona, Phoenix, Mesa and the east valley.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Homeowners’ Associations and Fiduciary Duties, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.