When Condo Boards Face Personal Liability
When Condo Boards Face Personal Liability: Fiduciary Duties and Reserve Fund Mismanagement
Understanding the Real Risk Behind Reserve Mis-management
After decades of serving on condo boards across multiple states, I’ve seen how even well-meaning directors can unknowingly put themselves at legal and financial risk.
When a board fails to maintain adequate reserves - or delays needed funding for big-ticket projects like roofs, paving, or siding - the result is often the same: surprise special assessments, angry owners, and sometimes lawsuits.
In extreme cases, individual board members have been held personally liable for breaching their fiduciary duties.
This article breaks down what those duties really mean, how courts have ruled in recent reserve fund cases, and what steps every board can take to stay on the right side of the law.
What Are Fiduciary Duties?
When you serve on a condo or HOA board, you become a fiduciary - someone legally required to act in the best interests of the entire association.
These duties form the foundation of responsible governance:
Duty of Care: Make informed decisions as a prudent person would - relying on professional reserve studies, expert reports, and data, not guesswork.
Duty of Loyalty: Put the association’s interests first. Never let personal benefit or political convenience influence financial decisions.
Duty of Good Faith: Be honest and transparent with owners about the association’s financial condition and reserve status.
Duty to Act Within Authority: Follow your declaration, bylaws, and state laws when setting or adjusting budgets and assessments.
If these duties are violated—through negligence, concealment, or self-interest - the Business Judgment Rule (BJR) may no longer protect the board. Without that shield, directors can be held personally responsible for financial losses.
When Boards Cross the Line: Six Real-World Cases
Here are six examples from small and mid-sized associations where courts found directors personally liable for mismanaging reserve funds:
1. California – Ravens Cove Townhomes v. Knuppe (1981, reaffirmed 2023)
The board ignored California’s Davis-Stirling Act reserve study requirements, leaving a $200,000 roofing shortfall. The court ruled the neglect was gross negligence, not a good-faith error.
Result: Directors were personally liable for $150,000 in damages.
2. Michigan – Developer-Controlled Board (2024)
A 30-unit community was turned over with almost no reserves because the developer board kept dues artificially low to sell units.
Result: Courts found a breach of loyalty and imposed $150,000 in personal surcharges plus $200,000 in association damages.
3. Massachusetts – Cigal v. Leader Development Corp. (1990, reaffirmed 2023)
Developer directors transferred a 45-unit property with reserves funded at just 10%.
Result: The Supreme Judicial Court found willful neglect and ordered $200,000 in personal liability plus $300,000 in back funding.
4. New York – Gold Coast Condo Ass’n v. Directors (2022)
Board members concealed a $300,000 boiler replacement deficit during elections.
Result: Bad-faith concealment voided BJR protection; two directors were personally liable for $100,000 plus punitive damages.
5. California – Dover Village Ass’n v. Jennison (2010)
Directors ignored required triennial reserve studies and deferred known repairs.
Result: Found guilty of gross negligence; $100,000 personal liability and $200,000 in damages awarded.
6. Washington – Cascade Bay Condo v. Board (2018)
The board repeatedly waived reserve contributions without justification, creating a $450,000 repair shortfall.
Result: Court ruled reckless disregard of statutory requirements; directors owed $75,000 personally, plus attorney fees.
Lessons Every Board Should Learn
These rulings show that underfunding reserves isn’t just a budgeting mistake - it can be a legal breach.
Key takeaways for board members:
Conduct Regular Reserve Studies: Follow your state’s legal frequency (every 3–5 years in most states).
Avoid Conflicts of Interest: Never prioritize sales, politics, or short-term convenience over financial stability.
Be Transparent: Report reserve fund status openly in budgets, meetings, and resale disclosures.
Document Decisions: Record your reasoning in meeting minutes - it proves good faith and protects you later.
Carry Adequate D&O Insurance: Even responsible boards need protection from claims.
Never Waive Reserves Casually: Doing so repeatedly without a study or owner approval invites personal exposure.
What Owners Can Do
If you’re an owner concerned about reserve shortfalls or upcoming assessments:
Review your governing documents to understand funding requirements.
Ask for the latest reserve study and compare it with the current budget.
Raise concerns in writing before considering legal action.
Consult a condo law attorney if you believe the board has breached its fiduciary duties.
The Bottom Line
Boards don’t have to be perfect - but they do need to be proactive.
Neglecting reserves doesn’t just put the property at risk; it can also put individual directors in the legal crosshairs.
At ReserveScan™, we help associations identify financial shortfalls early through fast, technology-driven reserve estimates - before they turn into six-figure assessments or lawsuits.
Understanding your true reserve position is the first step toward responsible planning and long-term financial health.
📊 Ready to See Where Your Association Stands?
Get an Estimated Reserve Study through ReserveScan™ today and see how your funding compares to your property’s actual repair needs.
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Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific legal concerns, consult a qualified attorney familiar with condominium and HOA law in your state.
