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Developers Breach of Fiduciary Duty

Written by Attorney Michael T. Chulak

When the developer of a common interest development serves on the board of a homeowner association, or otherwise controls the board, the developer owes a fiduciary duty to the association and its members. This means the developer must:

Place the interest of the association and its members above his own interests;
Be absolutely loyal to the association;
Establish a separate HOA operating account and reserve account on or before the date the first escrow closes;
Pay assessments into the HOA operating account, before the delinquency date, for all unsold units or lots;
Use association funds (assessments) only for association purposes which does not include paying costs to cure defects or other non - association related expenses;
Provide the association (corporation) with copies of those documents set forth in Regulation 2792.23 of the Real Estate Commissioner of California;
Avoid or disclose any actual or potential conflicts of interest; and
Repair any construction defects properly and timely utilizing his own funds.

The failure of the developer, acting as a board member, to place the interests of the association and its members above his own interests can lead to a legal claim by the association or its members for monetary damages, including punitive damages.

Developers sometimes breach in their fiduciary duty to the association and its members by signing contracts on behalf of the association with management companies and other service providers with which the developer has a special relationship. New board members taking over from a developer controlled board should investigate all existing contractual relationships to make certain they are arms - length agreements.

Call attorney Michael T. Chulak at 818-991-9019 or 800-565-2232 for a no cost initial consultation regarding any legal matter.

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