Upholding Your Fiduciary Duty Transparency is the Best Path for Boards

Upholding Your Fiduciary Duty

Being on the board of a co-op or condo is a big responsibility— one that shouldn’t be taken lightly. While some people may run for a board seat just to have the title, they need to be prepared to govern fairly and make decisions that are in the best interest of the community as a whole.

On Whose Authority?

Charles A. Perkins Jr., of Perkins & Anctil, PC, in Westford, Massachusetts, notes that condo boards derive their authority from the condo statute, the condominium documents, and case law. Every board member should read the bylaws carefully, because they are charged with the legal responsibility for knowing their contents and seeking legal advice in areas where they don’t.

“I find that it’s a small minority of boards that really go beyond their authority,” Perkins says. “Most know enough to ask, or the property manager will advise them to ask a lawyer” when they’re unsure about exercising their authority. “But I do find sometimes that boards tend to ignore the process; they don’t have rules of conduct for their meetings.

“For example, the chairman might say, ‘I’ve got three votes, the motion passes’ — without giving the minority member or members an opportunity for input. So contracts get approved without debate, budgets get passed without everybody weighing in on it, decisions on fines and other things are made without a full discussion.” And that’s when troubles begin.

Avoiding Conflict

Making solid, well-grounded decisions is essential for boards to fulfill their primary obligation, to follow a set of directives commonly known as “fiduciary duty.” These are decisions made on behalf of their fellow residents, 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 board members who stray.

“The board has broad authority set for in the declaration of trust, exercising the business judgment rule,” says Howard Goldman, principal at Goldman & Pease in Needham, Massachusetts. “The board determines, by a majority vote, what are the most important things. If the board is acting in good faith, with the best interest of the association at heart, what they decide cannot be legitimately challenged.

“That doesn’t mean people don’t try,” he notes. “But if two people can look at the same data and come up with a different conclusion, that doesn’t mean the trustees are wrong. To overturn a board’s vote on how to spend money, it has to be egregious.”

The fiduciary relationship is a higher duty than people have to each other in daily life — a special obligation that only exists when someone takes a position like serving on a board. In the broad sense, attorneys explain, a board member has a duty to act only in the general and common interest of the association and not in the service of his or her personal interest or bias.

For example, let’s say there’s a board member who purposely hires someone with whom he or she has a preexisting relationship, even though that person isn't the best person for the job. That could be seen as an abuse of power on the part of the board member. Or let’s say there’s a leak in the building and a board doesn't do anything to fix the problem, either out of apathy, incompetence, or antipathy toward the affected resident. That’s a breach of its fiduciary duty.

It’s easy for a board member to slip over the conflict line, thinking that he or she is being helpful by supporting a vendor he knows well — maybe even a family member who happens to own a company that provides a needed service. But that action can open the door to questions. “Some boards adopt specific conflict of interest rules,” Perkins says. “If I were a board member and there was a possibility of a conflict, I wouldn’t even be in the room” when a decision was being made. That’s not to say a board member should never offer suggestions or support based on past experience with a vendor. But, Perkins cautions, there should always be full disclosure, confirmation that the proposal is equal to or better than any other, and the interested board member should avoid participating in the vote. “You’ve got to be very careful.”

At the same time, having some kind of relationship with a vendor is not necessarily forbidden. “You see it happen a lot, especially with snow plowing and gardening or lawn maintenance, where someone will have a relationship,” Goldman says. “Most documents say it’s okay, but you have to make full disclosure, in writing, so all the trustees know, and they (the vendors) have to charge a fair sum.”

With larger projects, there may be less of a question, he notes, because boards will get two or three bids, “and you definitely want to show that the proposal being made by the related party is fair and reasonable. You don’t necessarily have to get the lowest (price), but you want it to be in the ballpark. Quality, quickness, service, and response time are all very important. The big issue is getting other bids, to show that this is a fair bid.”

Under Control

There are cases every year, it seems, with boards not fulfilling their fiduciary duties and even going against them, says Dennis H. Greenstein, a partner with Seyfarth Shaw LLP in New York. Common breaches he has seen include stealing funds, failing to have needed repairs made, failing to review applications for sales or rentals, violating laws relating to the operation and governance of the building and its unit owners, allowing defaults of unit owners to continue without board action and failing to hold annual meetings.

In his career, Greenstein says he's seen numerous cases where a single board member has completely usurped control of a cooperative or condominium, with barely a whisper of dissent from the other board members. “In one instance, a board member bought and sold the apartments of shareholders in default on their monetary obligations to the cooperative. He made self-dealing monetary decisions affecting the cooperative, causing assessments to be levied against all of the shareholders,” Greenstein says.

“It happens — you get the dictator,” Goldman concurs. “We get this question when we speak at seminars and expos, about the overly-aggressive chairman who won’t let go. A trustee is in a tough position; you don’t want to be a rubber stamp. A trustee has a fiduciary responsibility to himself, too, to question (board or chairman) decisions and not be a rubber stamp.

“And there’s politics involved. There’s a lot of disagreement with trustees and unit owners. It can create an opportunity where some people will get upset (with the existing board) and will vote their own people in. On the other hand, sometimes there’s a lot of apathy, and then you see a runaway trustee take over,” Goldman says.

Favoritism toward certain selected unit owners, to the detriment of others, also constitutes a breach of the fiduciary obligation in the sense that it violates the equality aspect of a board member's duty of utmost good faith towards his fellow unit owners. There have been cases where a unit owner was friendly with the board chairman, wanted to modify a unit, and got the chairman’s approval without a vote of the board. “That trustee has exceeded his scope of authority,” potentially causing problems down the road. “When trustees act, they must act by majority.”

And, of course, the board has to be responsible in handling the association’s finances. Failure to properly fund the reserve account, which is an important part of the board’s fiduciary responsibility, has surfaced as a problem at more than one association.”Fannie Mae requires that 10 percent of the yearly condo budget be set aside for reserves,” Goldman says. “If they don’t see that 10 percent, they’re not going to approve loans” for units in the association. It’s a fiduciary obligation of the trustees to properly budget and to put money aside for reserves,” so that when major components need to be repaired or replaced, the funding is available.

If a board member is found to be neglecting and breaching his or her duties, the penalties can include personal liability to all board members. “Owners can bring derivative actions on behalf of the entity to recover damages caused by board members malfeasance,” Greenstein notes. “It could also lead to loss of insurance coverage protection and indemnification under the bylaws, as well as personal liability and judgments.”

If condominium unit owners or co-op shareholders feel that one or more board members are not acting appropriately, they have the ability to remove and replace them at the next regular election or, in an emergency situation, by special election.

The best way to avoid problems, professionals say, is to keep all board actions open and visible. By being kept in the loop, unit owners are less likely to think that favoritism or under-handed activities are occurring. “I think a board training session is good for new board members — or for all board members,” Perkins says. One lesson to be learned: there will be disagreements, but that’s okay. “People may disagree with you and you may lose — but you can’t take it as tantamount to a declaration of war. You need to remember that the process is as important as the substance. If it’s not perceived to be fair and transparent, it taints what you do substantively.”

The Final Word

True, there are some horror stories that exist with board members failing to live up to their fiduciary responsibilities, but for the most part, boards do take their role seriously and a much greater percentage never see a problem. “If the trustees are acting in good faith and have appropriate backup and have done their homework, you really have to defer to them,” Goldman says.

After all, these people live in the building, too, so it doesn’t behoove them to neglect that leak or do something that will hurt their property values. If you feel there is a problem, sometimes just bringing it to the attention of the board will rectify the situation and help right the ship.     

Keith Loria is a freelance writer and frequent contributor to New England Condominium. Associate Editor Pat Gale contributed to this article.

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