HOA board members’ liability draws court scrutiny
Appellate panel overturns lower court decision hereAugust 28th, 2014
dge applied the wrong standard of care when she decided that board members of a homeowners association in Mead shouldn’t be held individually liable for their actions, an appellate court panel here ruled last week.
The case stemmed from a lawsuit brought by James Waltz and Marilyn Miller, husband-and-wife residents of the Tanager Estates planned unit development and members of the homeowners association there, following a dispute over a home remodeling project they had begun.
In issuing its partially published opinion, the Washington state Court of Appeals Division III, based in Spokane, reversed Superior Court Judge Linda G. Tompkins’ bench trial ruling against Waltz and Miller and remanded the case back to Superior Court for a new trial.
Court opinions are rarely published, since to do so means the originating courts believe they contain potentially precedent-setting interpretations of the law and deserve to become part of what collectively is referred to as case law, available to be cited in future cases.
Directors of nonprofit corporations, which include HOAs, enjoy immunity from civil liability from state law unless the legally challenged act or omission constitutes what’s considered to be gross negligence or violates a duty owed to the corporation or shareholders of the corporation.
In the published portion of its ruling, the appellate court panel found that Tompkins improperly applied the gross negligence standard to the actions of the Tanager Estates HOA board members, when it should have applied the violation of duty standard.
“It is understandable that the Legislature chose to maintain a higher standard of care to those with whom the directors have a fiduciary relationship,” wrote Judge Kevin M. Korsmo, who authored the opinion, which was supported by the two other judges on the panel.
“Since the directors owed the Waltzes, as members of the corporation, the obligation to act in good faith with the care of an ordinarily prudent person, they could be liable to them for negligent actions,” Korsmo wrote. “The court erred in applying the higher standard of gross negligence. Thus a new trial is needed at which the appropriate standard is applied.”
John H Guin, attorney for Waltz and Miller, declined to talk about the significance of the ruling since a new trial is pending, and Timothy P. Cronin, counsel for the homeowners association, couldn’t be reached immediately for comment.
The tangled facts of the case led Korsmos to use a sporting analogy near the top of the opinion, saying, “As often happens when neither side abides by the rules of the game, the referee faced a difficult problem determining who fouled whom and which fouls deserved to be called.”
The dispute began when Waltz and Miller began building a storage shed at their home at Tanager Estates without first obtaining permission to do so from the HOA’s architectural committee. As an HOA, Tanager Estates is subject to what are called covenants, conditions, and restrictions—also called CC&Rs—that are enforced by the homeowners association.
Board Vice President Gary Wilson alerted them to the procedure they must follow, after which they obtained the committee’s approval to construct a storage shed, shop and a garage addition for a third car. However, a dispute later arose over whether the addition Waltz was building was what had been approved.
Conflicting information from and confusion between HOA board members, and back-and-forth discussions between them and the Waltzes, eventually led to the board’s approval of plans for a project the Waltzes completed but considered unsatisfactory.
They filed their lawsuit in May 2011 against the HOA and most individual members of the HOA board, alleging violation of fiduciary duties. At the unsuccessful bench trial, they argued that the board’s negligence entitled them to financial damages and to rebuild the addition the way they wanted.
Although the appellate court sided with the Waltzes on the legal question about the threshold for board member liability, and remanded the case for a new trial, it said in the opinion, “There is plenty of blame to go around for both parties.”