NEW ENGLAND CONDO EXPO. NOV 2ND . BOSTON CONVENTION CENTER. REGISTER NOW!

Understanding Fiduciary Duty What Board Members and Residents Should Know

 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.  

 Consequences

 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

 Protect Themselves

 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.  

Related Articles

Board Members' Relationships

How Close Is Too Close?

Q&A: Should “Volunteers” Be Compensated?

Q&A: Should “Volunteers” Be Compensated?

Bidding Basics

Procuring Vendors the Right Way

 

11 Comments

  • Thank you for this article. It is nicely written and understandable. Unfortunately, it does not offer much hope for a person like me, a condominium owner in a three unit condominium where dipping into the treasury for personal uses is an ongoing fact of life. Where else could one steal from the organiational funds without even a slap on the wrist. Something wrong with the laws that allow this. No matter how you slice it, it'sl theft.
  • Great article. I wish it includes specifics about how long HOA in MA are required to keep books/recods on file. I am an owner and I like to know how far back can I request copies of HOA books and records and business receipt for purpose of auditing finacial activities. Can I ask for copies of the last 5 years? thanks
  • MIKE: I am not a lawyer, but I did happen to read that records must be kept for seven years. See Section 10 (c) of Chapter 183A of the Massachusetts General Laws. https://malegislature.gov/Laws/GeneralLaws/PartII/TitleI/Chapter183a/Section10
  • HELLO I am a homeowner in an HOA in maryland (65 homes). My wife has an at home daycare watching 3-5 children. All of which is legal, and confirmed by the HOA and their attorney. The HOA board is attempting to change the bylaw by going door to door to see if the homeowners supports such a revision to the bylaw.. We have attempted to contact the board for discussion as to what their activities are as we dont know what information they are handing out or telling people, yet they wont speak to us. requests have gone unanswered. We are currently NOT in violation of any bylaws. Here is my question: There are several at home businesses in the neighborhood, which ARE violations of the by laws (I dont agree with that bylaw) and nothing is being done to shut them down. Again I dont have a problem with at home businesses. The HOA board is lobbying to have the bylaw changed to ultimately put my wifes home daycare out of business. they are expending a lot of their time and energy, and potentially HOA resources to lobby for this change, yet they are doing nothing to address the current and active violations for which they are aware. Is this considered harassment, or selective enforcement, or breach of fiduciary duty. any help or response would be greatly appreciated. We feel harrassed and singled out. Thanks
  • Question. If a board member breach his fiduciary duty by falsely using management company's address, does it have to go to civil court? Or can a homeowner or another board member take it to a small claims court?
  • In my condo group, the trustees have turned over annual fees of over half a million dollars annually to a long term manager (an original trustee) who has a contract that gives him control over all but 1.2 percent of the funds and has had no audit of funds for 13 years. Can trustees turn over complete control over all funds to a contractor - who as trustee wrote the basic documents that provide exclusivity to his firm? He also has established his real estate business as the exclusive seller of all condos- he did it when he was a trustee. Is this legal?
  • Just found out that Condo is charging different dues. Can this be done? We all have the same % of interest in the association.
  • property management company used our special assessment for other expenses. Heat was 101 F to 107F in our units windows were open when temp was 4F outside Officers did not do their fiduciary duties Are there any good condo pro bono attorneys around that would help 2 lovely senior citizens???? We are being specially assessed and meetings are not notified to all owners. Condo by laws are not followed. I paid all UNDER PROTEST. Now I do not know where to proceed. please help
  • Can an outgoing group of Condo trustees limit, reduce or undermine the fiduciary responsibilities of the incoming trustees by agreeing to a multi year contract with the property manage that exceeds the two year terms of the incoming trustees, leaving them bereft of and control over a half million dollar budget under a multi year contract with the property manager? Secondly, two of the four of the outgoing trustees are not registered in the registry of deeds (MA) a requirement of the Master deed, yet they vote on contracts and budgets. Are these votes binding on owners? Several requests for minutes of trustee meetings have been met with refusals to share minutes of trustee meetings where budgets and contract extensions were discussed Finally, the owners voted at a quarterly meeting (Late July) to have the trustees engage independent counsel to analyze the operating contract of the long term property manager. They have not done so As of December 28), but the contract will automatically renew within 30 days (for three years if the property manager is not noticed). Can they be liable for any negative outcomes or expenses for not implementing a vote of the owners? A concerned incoming trustee (Anonymous)
  • Thank you for all your comments. I live in a 10-unit, everyone-gets-along- mostly-over 65 condo. One of our Directors (a Master Gardener) loves to do the gardening & landscaping around our old schoolhouse building which is lovely and appreciated. Is there any law that says we cannot pay him (being a Director) - a stipend for all his work?
  • When my friend sold his condo in April of 2020 his association falsely listed that he had not paid condo fees, pet fines, inspection and legal fees on a Section 6D and then used it to surprise him with $2406 of deductions on his closing disclosure form. Bank records prove that all condo fees were paid. The pet fines totaled $75 and were in dispute. Emails prove that an inspection that was presented as "Free" was charged at $100. Legal charges totaling the remainder were never presented to my friend. Only one $275 legal invoice was disclosed. Two Cambridge, MA small claims cases have resulted. Can you recommend a attorney and/or cite Massachusetts or Federal Laws that were violated?