Tying HOA Directors to ARS 10-3830 via Planned Community Statutes
Dennis,
Unless I am mistaken, for incorporated non-profit HOA’s in Arizona, the board members are subject to, ARS 10-3830 which establishes general standards for behavior of Directors. And, again, unless I am mistaken, prosecuting violations of that requires messy, slow, and very expensive superior court litigation.
Since you are involved in lobbying for improvements to our laws Is there a way to establish a mandatory obligation for the board of directors of an Arizona nonprofit homeowners association (HOA) to adhere to the fiduciary duties and standards of conduct outlined in A.R.S. § 10-3830?
If we had that, then HOA members could use the ADRE to address when board members breach their fiduciary duties, such as “to always act in the best interests of the HOA”…. Doing it the ADRE route would only cost $500, and limit exposure risk of massive atty fees.
Thank you for your thoughts on this.
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Ray,
In reality, the duties of a board in these communities are not based on the business judgment rule on the cited non-profit corporation act. Arizona Courts in Tierra Rancho v Kitchukov in 2007 established the board duties to the homeowners as prescribed in the Restatement of Law Property Servitudes. Specifically, they disavowed the business judgment rule for these communities. I’ve worked for three years to codify that ruling into statutory law for precisely the reason you mentioned. This year, we took a different approach, and I drafted and got introduced HB-2410 on board duties. That bill was held in committee based on the number of bills needing to be considered by that one committee, but this bill will come back next session.
The business judgment rule will not do what you hope to accomplish as it is so general and has no real applicability to these communities. Most HOA attorneys tell their boards that they are only subject to this rule and owe no loyalty or duty to their homeowners.
We will get there eventually but it takes time, and help from more homeowners in this coaltion.
Dennis
Dennis,
I greatly appreciate your insights and all the work you’ve done advocating for homeowners’ rights in Arizona. Your dedication to improving HOA governance is truly commendable, and I always find your perspective thought-provoking.
Please forgive me if I’ve mis-understood, but I wanted to ask for some clarification on your point that A.R.S. § 10-3830 does not apply to HOAs. After reviewing Tierra Ranchos v. Kitchukov (2007) CASE TEXT, I noted that the court explicitly stated: “Arizona courts look to the Restatement for guidance IN THE ABSENCE OF CONTROLLING AUTHORITY.” (emphasis supplied).
This, to me, suggests that when a statute provides clear direction, Arizona courts will apply it before turning to the Restatement (Third) of Property: Servitudes.
Since most HOAs in Arizona are incorporated as nonprofit corporations, they fall under the Arizona Nonprofit Corporation Act, which includes A.R.S. § 10-3830. This statute defines the fiduciary duties of directors—including those of HOA board members—requiring them to act in good faith, with due care, and in the best interests of the corporation.
I understand that Tierra Ranchos rejected the business judgment rule for HOAs, but I don’t see anything in the decision that negates the application of A.R.S. § 10-3830. Instead, the court simply applied a reasonableness standard when reviewing HOA board actions—consistent with the Restatement— like Architectural approvals, without displacing statutory corporate governance requirements.
Would love to hear your thoughts on this. Always appreciate your expertise on these issues.
Best,
Ray
Ray,
The answer lies in the Restatement itself. The authors clearly established that the organizational structure of these communities is irrelevant to the legal principles governing these communities. The authors clearly established that the business judgement rule is too favorable to the association and does not adequately protect the homeowners. The Arizona Apellate ours expressily stated the same principle. The business judgement rule of 10-3830 does not apply to these communities and the Restatement sections 6.13 and by default 6.14 apply to these communities. While the HOA attorneys all ignore this clear guidance because they can to the detriment of every board that is their client. The precedent is set and they are all wrong in their guidance.
The Court did not expand on this point but there is no requirement for these communities to be non-profit corporations, they can be for profit corporations or they can be unincorporated entities. Property servitude law applies to all these communities. Think of the issue in this way. No matter what CAI and the association attorneys say these communities are communities first where people live and incorporated only for convenience and tax advantages. They bear no true resemblance to any corporation. They are much more similar to a municipality than a corporation and Property Servitude law reflects that reality.
Dennis
Ray,
One more thing the Court along with the Restatement also rejected the “Reasonableness Standard” for these communities as that standard provided too much benefit to homeowners over that of the association. The Restatements standard was created as a balance between both the business judgement rule and the reasonableness standard. The Restatements reflects the definitive common law for the country for these communities and all other property servitudes. It was the product of 16 years of work reviewing case decisions from over 50 years of history relating to these communities.
State statutes also reflects the truth of these communities. If they were simply corporations than there would be no need for the Condominium act or the planned community act. Yet we have those specific statutes for a reason.
Dennis