Generally speaking, as an unpaid fiduciary, you don’t always have to be right. You don’t even have to be smart, but you can’t just ignore items that are brought to your attention. You have to exercise some level of business judgement. You can’t knowingly gamble with association funds or assets. When investing the reserve fund, the “Prudent Man” theory is often mentioned as a guideline. That concept states that the preservation of the capital is more important than getting the highest return.
You’d also better stay away from what is called “self-dealing. That means that the association really should not be paying you for work you do for the association. When you are responsible for the work, and then also responsible for judging whether payment should be made, you put yourself in a conflict of interests that could be considered a breach of your fiduciary responsibility.
Bringing personal agendas to the board meeting, and making decisions based on your own personal biases rather than what is right for the community is an area often pointed to as an opportunity for a breach of fiduciary responsibility. If one board member doesn’t like his neighbor, and is shown to be selectively enforcing rules to harass that neighbor, then there might well be a case of breach.
One has to wonder if the board members in Virginia and Florida that went to court over one of their resident’s right to fly an American Flag on a flagpole outside their home were exercising good judgement or representing the wishes of their constituents. Apparently their pursuit of these issues was not considered a breach of fiduciary duty, but many felt it was really bad judgement.
What are the penalties for breach of fiduciary responsibility? That too is hard to define. How much does your D&O policy protect you? When doesn’t it protect you? Certainly if there are monetary damages involved, the board member might be held liable for them. Legal fees related to the defense of a charge of breaching fiduciary responsibility might rightfully be borne by the individual board member, not the association. Some D&O policies will pay for legal defense, but only if they believe the board member acted correctly. Insurance companies are there to protect you when you are right, not pay your legal bills when you’ve been wrong.
Here’s a little exercise for you from the real life chronicles of “Condo Man”. See if you can see where there may or may not be a “Breach”.
Once upon a time in a land not so far away (Framingham, Massachusetts) there existed a self-managed condominium. There is no professional property manager overseeing or guiding the actions of the board. In fact the community has been in existence since 1973 without such guidance. The board members rightfully feel quite proud of their efforts over the years. Their volunteer time is enormous and just as unappreciated as those communities that are professionally run and board member time is limited to the 2-hour monthly board meeting. These folks in Framingham put in ten times that amount of time and even more on occasion. Believe it or not, they’ve managed to stay out of any major trouble. They have well-respected legal counsel that they rarely call. They focus on saving money with the confidence that they’ve done it themselves for three decades and they can continue to do so. There is a reasonable constituency of investor units that are thought of darkly. Absentee owners are not appreciated here and renters get the same kind of prejudicial attitude you find in many communities. Not necessarily justified, but a very real element of the environment. You can understand how a board member putting in 20-30 hours a month as an unpaid volunteer for the good of the community would feel about an absentee landlord who is actually making money as a result of the volunteer efforts of the board. It seems like one of life’s inequities, but it is reality. It is then certainly understandable that one of these hard-working self-sacrificing board members would not be very sympathetic to any problems that might occur in rental units. It offers a very dangerous opportunity for board members to act in a way that tests their fiduciary responsibilities, because in fact they are fiduciaries for the absentee landlords as well as the owner occupants. Do they owe a different degree of responsibility to an absentee-owner?
Here’s the chronicle. You decide.
Absentee owner gets a letter in the mail stating that there is a sticky front door that is shared by him and his neighbor. The letter states that the owners must repair the door within 7 days or face a fine of $25/day each until it is repaired. The letter is posted on a Friday of a holiday weekend, and as a result is not received by the homeowners until Tuesday with the following Friday being the deadline.
It’s important to note two things. First, the governing documents of the condominium specifically state that if there is a maintenance problem with this particular front door, the board will notify the two owners involved, give them 14 days to make the repair, and if it is not made, then make it themselves and charge back the appropriate owners for their share. Second. The board member in charge of maintenance has had previous unhappy experience with the absentee-owner of one of the units and has stated that he does not enjoy managing rental units without getting paid.
Back to the story. The absentee-owner receives the letter Tuesday night, comes down to the property Wednesday to see what the problem is and finds the sticky door. He asks the maintenance man to fix it and bill him. The maintenance man refuses. He knocks on his neighbor’s door to see what help he can get. No answer. He tries to telephone the neighbor that night, but finds the number unlisted. He leaves a note for the board on Thursday explaining that he can’t get in touch with the neighbor to agree on a repair and the maintenance man has refused to help. With only one day left before the $50/day fines begin, he is looking for some immediate help. The board ignores the written message. The absentee-owner knocks on the neighbor’s door again with no result. He then contracts with an independent professional property manager to have the door repaired by a reputable company willing to come out and perform emergency service at a premium. Once the repair is completed in the mandated time period, he writes a letter of complaint to the board regarding their unfair deadline and non-cooperation. They write back with an apology saying they made an error and should have given the unit-owners 30 days to resolve the issue. The absentee owner had requested a telephone number for his neighbor from the board, but got no response. That request was made three more times over the next two months with no response from the board. Finally the board sent a letter telling the absentee owner that his neighbor was in jail and they couldn’t contact him either. They denied any responsibility for sharing in the cost of the repair. They told the absentee owner that he had to bear the full cost of the repair or work it out with his unavailable neighbor.
Breach of fiduciary responsibility? Extremely uncooperative attitude. Deliberate breach of the provisions of the governing documents. Frustrating to the absentee owner who was inconvenienced in a pseudo-emergency of the board’s making and at risk for the entire cost of the repair that was performed. What did the absentee owner do? He decided that life was too short to make a big deal out of getting overcharged $150 and went about his business. Volunteer Board Members 1 - Absentee landlord 0.
Two months later in December, the same absentee landlord gets a call at 7:30am on a Sunday morning from his tenant. The basement is flooded and she’s afraid that the electric wires will blow up and that there will be mold and that the whole building will collapse. Twenty minutes later the absentee landlord is at the back door of the unit and goes down to inspect. Yes. There is a problem. Because the buildings contain eight units each with basements separated only by plywood paneling, the problem likely effects more than just the one unit. He calls the emergency number for maintenance for the condominium and gets the answering service. He reports the problem and asks for an immediate call back to see what can be done. After an hour of listening to the tenant rant and rave about her rugs and furniture being ruined and impending doom from short circuits and mold infestations, the landlord calls the emergency number again. The telephone answerer explains that she has passed the information on to the maintenance department with no response. After all, it is Sunday.
Waiting another hour for some support brings nothing. At 11am the absentee owner gets on the phone to contact a professional flood restoration company. The concern here is also that the problem is widespread and that just solving the problem in his unit will not really solve the problem. It’s a shared situation. By 1pm the emergency truck arrives, pulls right up to the back door to get their equipment hooked up immediately and start draining the basement. An hour later up wanders the board member who is head of maintenance and orders the emergency vehicle to get off the lawn. Parking on the lawn is clearly a rules infraction. It’s pointed out that there is an emergency situation going on and that the truck is involved in getting water out of a basement. This does not impress the board member. He announces that he is fining the unit owner and that if the truck does not move, he will have it towed. The emergency people continue to do their job. The board member calls the maintenance man who responds within 20 minutes and is down to the property to call the tow truck to remove the emergency vehicle. By this time the flood remediation is done and the vehicle is removed.
Here are a few points to ponder. How come an illegally parked car is enough of an emergency to get the maintenance man down to the property, but a flooded basement is not?
If the emergency vehicle must be towed because it is allegedly causing damage to the lawn on which it is parked, what kind of additional damage to that lawn might be created by a big 10-wheeled hydraulic lift tow truck climbing up on that same lawn and dragging the truck off? Is the decision to call a tow truck a breach of fiduciary responsibility? Probably not, just poor judgement and there is no law against being stupid. Is ignoring a flooding basement a breach of fiduciary responsibility? Maybe if it was the board member who failed to respond, but the maintenance man is not a fiduciary. What can you say about the situation? Not much. Frustration and poor judgement comes with everyone’s life. The fact that this was the same absentee owner and the same board member involved in the sticky door incident might indicate a pattern. It might just be bad luck. Solve the flooded basement problem and move on.
Not quite. The absentee owner finds a note in his mail two weeks later fining him for the emergency vehicle and charging him for repairs made to the lawn and shrubbery around the unit. The fact that there is no shrubbery within 50 yards of the unit is the first tip-off that this is not exactly a legitimate bill. The idea of doing lawn repairs in December is another. Fining an emergency vehicle performing an emergency service that should rightfully have been addressed by the board is the third issue of concern. Fines are punitive, designed to punish people for doing bad things. Preventing damage to the building and neighbor units is not exactly a heinous crime. In fact, the non-response of the maintenance man is more in line for some kind of punitive response than the actions of the emergency crew. What does the absentee owner do? He pays the fine and the charges immediately, not wanting to make the situation worse. He writes a letter to the board explaining his feelings about the board’s responsibility and actions. He points out that there must be some mistake because there is no shrubbery and nobody in their right mind tries to make lawn repairs in the middle of the winter and what should have been done given the flood anyway? The board responds that the fine and charges stand.
Absentee owner smells a pattern here. He calls the attorney for the condominium and asks for some advice. The advice is to speak to the board and reason with them. The attorney can not get involved unless the board calls him. Another request for redress by the board is ignored. The absentee owner decides that this pattern must be stopped. He files in small claims court. He also prevails upon the law firm used by the association to do a mediation of the situation at no cost to the association to put an end to what appears to be an escalating problem. The board ignores the request for mediation.
Trial day comes up. The court clerk first offers official mediation done by the court. The board member refuses. The case is heard. The board member shows up with the maintenance man as his legal counsel. He testifies that the bill for the repairs was an error. They didn’t make any repairs. They just estimated what it might cost. He said the $80 charge was what the maintenance man charged them to come down on a Sunday to call the tow truck. In fact each one of the charges outlined on the bill to the absentee owner was incorrect. In fact he had even more pretend charges he had yet to send and he wasn’t done with this guy yet. The magistrate heard both sides and awarded the absentee owner a refund. The response of the board was to send another bill “they had forgotten to send” for almost double the amount the judge had just awarded the homeowner.
Breach of fiduciary responsibility? There was no self-dealing here. The board members did not benefit financially from any of these actions. Their judgement in regard to the emergency vehicle is worth reviewing, but once again, stupidity is not illegal. The one thing they cannot do is ignore the court’s decision. They cannot go back after losing and insist they were right and try to coerce the absentee owner into paying again. Once again the absentee owner prevails upon the legal counsel for the condominium to offer a no-cost mediation hearing to try and resolve the issues. The response from the board is that they feel there is a conflict of interests and won’t participate.
The absentee owner figures that this is not a good place for rental property owners and decides to sell his unit. The board will not issue a release, claiming fines are owed. The absentee owner loses his sale and sues the association for “lost opportunity” and after 2 years in court wins a judgement for $400,000 against the association. But should the individual unit owners be responsible for the special assessment of $15,000 each to pay for the judgement? Shouldn’t these board members be directly responsible for their actions that seemed to border on some kind of bad faith? False invoices and ignoring court judgements do not necessarily fall under the areas of protected actions. Are they not in breach of their fiduciary responsibility even though there was no self-dealing? Don’t they have an obligation to be reasonable? And what are the penalties if they are not?
What would you have done?