Being elected to the board of a co-op or a condo comes with a great deal of power, and with that power also comes a great deal of responsibility. Whether they serve a co-op or condo community, trustees and board members, in their position of power, have a responsibility to govern and make decisions on behalf of that community often referred to as the board's “fiduciary duty.” Decisions made on behalf of their fellow residents must be made in good faith and with the best interests of the community firmly in mind. Violating this duty can lead to legal consequences for boards and individual trustees or board members who stray.
Fiduciary Duty in a Nutshell
The fiduciary duty in the co-op and condo board context arises out of the special relationship that exists between directors of the boards and the shareholders and unit owners who place their trust in these directors. A fiduciary relationship can be formed in other types of relationships such as lawyer/client, broker/client, or even clergyman/congregant.
“As board members they are elected officials, so they have various powers and responsibilities,” explains Frank A. Flynn, Esq., managing partner of Downing & Flynn in Boston. “So when they are engaging in the use of their powers and responsibilities, they have a duty that’s higher than their self-interest. Those higher responsibilities are what’s called their fiduciary duties. Board members are unit owners, too. It’s not about what’s best for them as a unit owner, it’s about what’s best for the condominium association as a whole and that’s where their fiduciary duties come about.”
In more practical terms, “Fiduciary duty is a duty of loyalty to the organization, and in this case the condominium community,” says attorney Charles A. Perkins of Perkins & Anctil, LLP in Westford, Massachusetts.
“The most general fiduciary duty that generally applies across the board is that the board members have a fiduciary duty to maintain, repair and restore the common areas of the complex,” says Dedham, Massachusetts-based attorney Pamela M. Jonah of Goodman, Shapiro & Lombardi LLC. “The upkeep of common areas is their [board members] big thing.”
According to Perkins, the concept of fiduciary duty is the same for both co-op and condo boards because fiduciary duty in and of itself doesn’t change from organization to organization.
Thus, the fiduciary duty in the co-op and condo board context illustrates the special responsibility that trustees and board members have, given their position of influence over the property and lives of the shareholders and unit owners.
A Breach Equals Abuse of Power
So what exactly does it look like when a board member breaches their fiduciary duty? “There are many examples of breaches of fiduciary duty,” says Perkins. “You’ve got simple ones. You’ve got somebody on the board and they decide that they should get something that someone else in the association shouldn’t get, preferential treatment. For example, ‘I get my unit painted first, I get landscaping and no one else does. I get mulch and other people don’t.’”
According to condominium law experts, real-life breaches of fiduciary duty really just boil down to abuses of power, and these breaches usually fall into three categories: self-dealing, exercising of personal vendettas and selective enforcement.
Self-dealing. Self-dealing occurs when board members obtain a personal advantage from their position on the board, and take an opportunity, no matter how big or small, that should have lawfully been available to the shareholders or unit owners of the co-op or condo. “Board members have a duty of loyalty to the condominium association as a whole,” says Flynn. “There is also a duty of fair-dealing. Fair dealing means that when you go to negotiate with a landscaper for the condo association, it’s not about that board member negotiating a great deal for their unemployed brother-in-law. Fair dealing means that they would deal with vendors or third parties fairly and not just engage in their own self-interest.” This type of activity constitutes self-dealing, and is considered to be a breach of fiduciary duty.
The most obvious case of self-dealing is when a board member steals money from the co-op or condo’s reserve fund. “Let’s say the treasurers are handling all the money and all the monthly condominium fee payments for upkeep for the common areas,” says Flynn, “Say every month there is $200 that every unit owner pays. Some of the money should go into the condominium operating account and some of into a reserve account. Well, the treasurer [of the board] shouldn’t be taking money out of the operating account for themselves. That would be a great example of a breach and it happens more often than you’d like to think.”
Flynn notes that if an operating account or reserve account seems unusually low or if checks are going out to non-existent vendors, someone on the board may be pilfering funds.
Exercising of personal vendettas. Another abuse of power and breach of fiduciary duty can occur when an individual trustee or board member treats a shareholder or unit owner unfairly just because the board member has a personal issue with that person.
Board members have a lot of power to make life difficult for unit owners they may not get along with. This can be an abuse of power. For example, suppose that a board member is clashing with a unit owner over noise complaints or second-hand smoke, and the unit owner submits a request to do an alteration—then the board member persuades his colleagues to reject the alteration. Since there was no legitimate reason for the rejection other than to fuel the board member’s vendetta against his neighbor, the situation illustrates an abuse of power and breach of fiduciary duty.
Selective enforcement. The third kind of breach of fiduciary duty is when a trustee or a board member plays favorites in enforcing building rules and regulations. For example, if a building has a ‘no pets’ policy, but a board member looks the other way when a dog belonging to a friend comes into the building, that is considered to be selective enforcement.
If a trustee or a board member is found to have breached his or her fiduciary duty, the consequences can be severe. “If they are stealing money there could be criminal penalties,” says Flynn. According to Massachusetts state law if you steal over a certain amount of money [$250] it’s a felony. That means it’s a crime, not a misdemeanor and you can possibly face jail time.”
“Penalties for a board member breaching fiduciary duty are really a unique thing,” says Jonah. “Even if a unit owner, or group of unit owners take the board to court and say that they’ve breached some fiduciary duty, the ultimate result would be for them to take the corrective measures, but all of the cost incurred with going to court and defending a claim of breach of fiduciary duty ends up being a charge to the condominium association as a whole. It’s a unique situation and it’s costly.”
Most condominium documents state that the penalty for neglecting one’s fiduciary duty is removal of the trustee from the board.
“In most associations you need a vote of 51% of the entire unit owners and that’s usually with or without cause,” adds Perkins. “Sometimes it’s hard to get all those people together unless you are particularly energized and explain to everyone what that fiduciary breach is.”
How Board Members Can
The last thing most volunteer trustees or board members want to become involved with is a lawsuit claiming they have breached their fiduciary duty. Most board members are not experts on all business matters they are involved in. “A lot of condominiums will get directors and officers insurance to protect themselves,” says Flynn.
Directors & Officers Liability insurance (often called D&O) is payable to the directors and officers of a company or to the organization itself as indemnifications for certain damages, losses or advancement of defense costs in the event any such insured suffers such a loss as a result of legal action.
When There’s An Abuse of Power
If the above examples sound all too familiar, what can you do? Aside from immediately seeking legal counsel, there are some steps trustees, board members, shareholders and unit owners can take. In order to do your research, check the bylaws to find out what remedies you may have. Obtaining copies of the minutes of board meetings may be helpful in finding information on the board’s conduct. If a resident finds facts (actions made in bad faith) that they believe are sufficient to constitute a breach of fiduciary duty, he or she can put the board on notice of the alleged breach, and request that the particular decision not be enforced. If the board is unresponsive to these requests, the resident should consult a lawyer to explore the possibility of obtaining a court-ordered injunction, to prevent the questionable rule from being enforced or transaction from happening.
Elizabeth I. Robbins, Esq. is an attorney admitted in New York and a freelance writer for New England Condominium. Staff Writer Christy Smith-Sloman contributed to this article.