The Washington State Court of Appeals, Division III recently published an opinion concerning the standard of care that is required of the board of directors in a nonprofit homeowners association. We summarize that case, Waltz v. Tanager Estates Homeowner’s Association, 332 P.3d 1133 (filed August 19, 2014), here, as it may be helpful to members of community association boards across the state. The holding of Waltz v. Tanager is that Association board members are held to a higher standard of care than “gross negligence”; instead, board members who fail to act in good faith with the care that an ordinary, reasonably prudent person would act, may be held personally liable for their actions.
Tanager Estates HOA is a planned unit development in Mead, Washington. Among the subcommittees of the HOA is an Architectural Committee (“AC”), which is in charge of approving or denying proposed changes or additions to existing homes. The Waltzes did not obtain AC permission before beginning construction. When alerted to this by the board’s Vice President (“VP”), the Waltzes submitted plans for the storage shed and a shop, garage addition, and “hip roof.” The AC approved those plans.
When the Waltzes began construction, it was not the same as the plans the AC had approved. The Waltzes continued construction on the addition, but submitted new plans to the AC. The AC denied approval of the new plans, and the board President gave the Waltzes a stop-work order. The Waltzes and the AC went back and forth, submitting plans and denying plans. Finally, the VP resigned from the AC in frustration, and the board President appointed, without authority, a new VP. After more back and forth and AC meetings, the AC finally approved a set of plans.
About three years later, the Waltzes sued the HOA and several individual board members, including the President, for, among other things, breach of fiduciary duties. The trial court applied an equitable estoppel analysis[i] and found that Firestone and the AC did not breach their fiduciary duties to the Waltzes because they were not “grossly negligent.”
The Court of Appeals reversed. The court held that members of the board in a nonprofit corporation are only held to a “gross negligence” standard in the performance of their official actions as to parties outside the corporation. For dealings between a board and the members of the corporation (in this case, members of the HOA), a standard of “reasonableness” applies. This means that if the President and the other members of the board failed to act in good faith with the care of an “ordinarily prudent person,” they could be personally liable to the Waltzes.
[i] Equitable estoppel is a legal constraint preventing a party from gaining advantage over another party if the second party claims injury due to reliance on misrepresentations by the first party. In other words, the Waltzes argued that they relied on the representations of the AC in beginning construction on their property and that they incurred losses as a result.