"Back to the Future:" HOA Directors Liable for Acts Before HOA Formed?

By: Dana Maine and William Ezzell

Here's a question for the Homeowners' Association (HOA) directors and officers out there: how far back in time can your duties owed to an HOA stretch? In Thunderbolt Harbour Phase II Condominium Association, Inc. v. Ryan, a developer of a condominium expansion learned that they can extend to problems caused before the construction of the units was completed. No. A13A1827 2014WL1243858 (Ga. Ct. App. Mar. 27, 2014). The court held that a condominium developer, who was also the initial condominium HOA director, owed a fiduciary duty as a corporate officer to turn over the common areas to the HOA in good repair. Plaintiff argued the common areas had been damaged during the initial construction. The court reserved the decision for a jury as to whether the developer breached his duty and was personally responsible for problems in the common areas.

In Thunderbolt, the developer oversaw a 2001 expansion of a condo complex. Construction wrapped up in the fall of 2003 and that following December, the developer filed Articles of Incorporation and created a separate entity to act as the expansion's HOA. That same day, the original condominium complex amended its declaration to provide that the expansion units would be administered by the newly formed HOA. The developer named himself as the initial sole officer and director of the HOA. He obtained insurance policies and collected fees, depositing them into the HOA bank account he controlled. By 2005 all of the expansion units had been sold. In 2006, the developer relinquished his position and transferred control to the HOA itself. Four years later, owners began complaining of defects in the common areas that they attributed to construction defects and blamed the developer. They alleged he owed the HOA a fiduciary duty and breached this duty by failing to inspect and maintain the common areas and sue subcontractors for defects. The trial court disagreed, concluding any fiduciary duty to cure common area defects arising from construction did not exist. Without a duty to breach, there was no issue for a jury to decide and the director could not be held liable.

The appellate courtbreathed new life into the HOA's argument, concluding that a jury could find that the developer owed a fiduciary duty to protect the corporate property, which included repairing construction defects in the roofing and exterior cladding. Because the developer was the general contractor overseeing the expansion, controlled the bank account himself (instead of the HOA), was the sole officer from the HOA's inception, imposed fees, and obtained insurance coverage, a jury could reasonably find that a the developer's fiduciary duty extended to preventing construction defects incurred before the HOA was formed. If the director failed to maintain the common areas or address the construction defects, he could ultimately be personally liable for damages.

Fiduciary duties owed by HOA directors are nothing new. This case is nevertheless alarming because the Court concluded a fiduciary duty to maintain common areas and cure construction defects, derived through the developer's position as HOA director, extended to problems that arose before the HOA even existed. As a corporate officer, the developer owed a duty to maintain the common areas and breached this duty when he supposedly turned over the expansion in poor repair. Additionally, as the Court of Appeals highlighted, the director's unilateral authority to act on behalf of the HOA could support a jury's decision to reasonably conclude that the director was an agent for the HOA, creating the fiduciary duty. Because agency relationships in turn create fiduciary obligations, the developer's unilateral supervision and administration of the expansion could qualify him as an agent and thus possibly responsible for failing to turn the common areas over in good repair.

The developer did not appeal to the State Supreme Court. This precedent therefore, while state specific, raises concerns for developers as the reach of a possible fiduciary duty has been expanded in time. If a condominium developer owes a subsequent HOA a fiduciary duty to preventing or curing construction defects before the HOA's formation, just how far back can the duty to protect corporate property extend? Based on this case, the duty can reach as far back as the initial construction.


"Back to the Future:" HOA Directors Liable for Acts Before HOA Formed?

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