A breach of fiduciary duty is one of the most serious issues that an HOA board can face. Homeowners elect board members to make decisions for the good of the entire community. But when board members step out of line, trust is broken, and homeowners start looking to legal action as the solution.
What is a Breach of Fiduciary Duty in Texas HOA?
Board members in Texas, whether in an HOA or a condominium association, are not just volunteers doing a casual job. They are considered fiduciaries.
This means they have a legal and ethical obligation to act in the best interest of the association. They must protect the community’s assets, enforce rules fairly, and handle decision-making with care.
Sometimes, a board member may act in a reckless or selfish way. They might make decisions outside of the scope of their authority. When this happens, it’s considered a breach of fiduciary duty.
In Texas, breaches can lead to consequences. The Texas Property Code, particularly Chapter 209 for HOAs and Chapter 82 for condos, lays out many of the responsibilities and limits. Courts in Texas have also recognized that directors owe fiduciary duties similar to trustees.
Duty of Care
The duty of care is about making informed and thoughtful decisions. Board members don’t need to be experts in everything, but they should use common sense, pay attention, and rely on professional advice when necessary. When a board member acts without doing their homework, they can put the entire community at risk.
Examples of compliance include:
- Reading financial reports before approving expenses.
- Asking questions before signing contracts.
- Hiring an engineer before deciding on a major repair.
Examples of breaches include:
- Approving a contract without ever looking at the terms.
- Ignoring obvious red flags in the association’s account.
- Delaying necessary safety repairs even after multiple complaints.
Duty of Loyalty
The duty of loyalty dictates that the HOA’s interests come first. It is simple in theory but harder in practice. According to the duty of loyalty, a board member can’t use their position for personal gain.
Examples of compliance include:
- Disclosing conflicts of interest
- Stepping aside from a vote when it involves their own business.
- Making sure every decision benefits the community, not themselves.
Examples of breaches include:
- Awarding a contract to their own company without disclosure.
- Using association money for personal purchases.
- Steering decisions toward helping friends or family.
Texas even addresses conflicts of interest directly. Under Section 209.0052, board members are required to disclose certain conflicts when entering into contracts. This rule exists to make sure board members’ loyalty is to the community, not personal profit.
Duty to Act Within the Scope of Authority
Board members don’t have unlimited power. Their authority comes from the Texas Property Code and from their governing documents. Acting beyond that scope is a breach.
The scope of authority is about staying in bounds. If the governing documents or state law don’t give permission, then the board can’t just create power for itself.
Examples of compliance include:
- Holding elections according to the requirements of the Texas Property Code and the association’s bylaws.
- Enforcing covenants as per the CC&Rs and bylaws.
- Approving dues in alignment with the governing documents.
Examples of breaches include:
- Imposing unauthorized fines.
- Spending reserve funds on personal pet projects.
- Refusing to hold required elections.
Is Breach of Fiduciary Duty a Crime?
A breach of a fiduciary duty is usually handled in civil court. This means homeowners can sue the association or the board member. A court may order the association or board member to pay monetary damages, impose injunctions, or invalidate decisions. Jail time is not normally on the table.
That said, there is a line. If the breach involves theft, embezzlement, or fraud, it can cross into criminal territory. Most breaches stay in civil court, but some can end up as a criminal case, too, depending on the action.
What are the Breach of Fiduciary Duty Penalties in Texas?
In Texas, there are no clear penalties for an HOA board breach of fiduciary duty, unless there was criminal activity involved. Instead, the consequences can stem from lawsuits.
Legal Action Against the Association
Homeowners can sue the HOA itself. For example, if the board holds secret meetings or ignores notice requirements, both of which are required under Texas law, a homeowner can file a lawsuit. A court may force the association to comply.
Additionally, the association can face injunctions or have to pay attorneys’ fees. These costs usually come out of community funds, which means every homeowner will have to pay for the board’s mistake.
Lawsuits Personally Naming Individual Board Members
Sometimes, homeowners will personally sue board members. If a director acted outside their authority or engaged in self-dealing, a lawsuit might name them individually. Section 82.103 of the Uniform Condominium Act specifically states that directors and officers may be liable for monetary damages as a result of a breach.
Directors and Officers (D&O) insurance can provide some protection, but it usually doesn’t cover fraud or intentional misconduct. This means the board member may find their personal assets at risk. Even just the stress of facing a lawsuit can be enough to push volunteers to resign.
How a Breach of Fiduciary Duty Affects HOAs in the Long Run
The long-term effects of a breach often can go far beyond a simple lawsuit. Parties, including the association, can lose money. The association’s reputation will definitely take a hit, and homeowners will lose their trust in the board.
Instead of using community funds to pay for projects, they will have to go to lawyers. This can result in underfunded reserves, deferred maintenance, and special assessments.
Worse yet, property values can plummet, as potential buyers will no longer find the community attractive or a safe investment. Lenders may also think twice about approving loans for homes in such communities, as unstable finances and leadership are seen as risky.
Trust within the community will undoubtedly suffer. Once homeowners feel that their board is untrustworthy, they may feel hesitant to participate in activities. They won’t attend meetings, making it hard to reach a quorum. The association might have a harder time finding willing volunteers, rendering board seats empty.
A breach of fiduciary duty can cause a domino effect, with the end result being difficult to reverse. It also creates a cycle where homeowners refuse to get involved, leading to the same mistakes over and over again.
A Significant Impact
A breach of fiduciary duty is no small mistake. It’s a huge violation of trust between the board and the community. While not every breach can end up in criminal charges, even just the civil penalties and aftermath can be detrimental.
Preferred Association Management Company offers exceptional HOA management services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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