Is Your Board Carrying
Out Its Fiduciary Duty?

Defining A Breach of Duty

Misconduct:

Vendettas:

Manifestation of Favoritism:

Consequences of a Breach of Duty

The business judgment rule

Liability

A breach of the fiduciary duty could result in grave consequences for both the offending board member and the Unit Owners which they represent.

The fiduciary responsibility has nothing to do with board members' skill or fervor.

Basically, a breach of the fiduciary duty to shareholders and unit owners occurs whenever Trustees Board Member(s) abuse such power results in harm to one or more of the Unit Owners.

The essence of the fiduciary relationship is best described as a relationship that is one founded on trust or confidence reposed by one person in the integrity and fidelity of another.

The rule embraces both technical fiduciary relations (i.e. trustees) and those informal relations which exist whenever one person trusts in and relies upon another.

A fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other.

Thus, the placement of one's trust, confidence and responsibility in another person or persons is the hallmark of a fiduciary relationship.

The investiture of such trust, confidence and responsibility in the fiduciary bestows upon the trustees a position of influence and superiority over the person(s) with whom they deal. As such, they are charged with an extraordinary degree of moral accountability to these people.

Thus, certain types of conduct which might be permissible in the context of ordinary business dealings are off limits to a trustee because of the special attributes of their relationship with the Unit Owners.

The courts have articulated two basic precepts of fiduciary conduct which define the honor standard: The duty of undivided loyalty by a trustee to the unit owners under their care; and the duty of a trustee to exercise the utmost of good faith towards the unit owners.

The duty of undivided loyalty basically requires the trustee to at all times put his charges' interest ahead of their own self interest and to refrain from profiting at their expense (i.e., no self dealing). The duty of utmost good faith basically requires the trustee to at all times treat their unit owners fairly and equally.

Thus, board members are fiduciaries to the shareholders and unit owners who have elected them to their position of power. Accordingly, individual trustee board members are strictly prohibited from self dealing to the detriment of their association and its constituent shareholders or unit owners. They are also required by law to treat their shareholders or unit owners with meticulous fairness and equality.

Defining A Breach of Duty
Since the fiduciary obligation is an elastic concept which contemplates any abuse of power, it is impossible to chronicle every act which could conceivably constitute a breach.

However, it is instructive to review the specific kinds of board member conduct which courts have already condemned as a breach of fiduciary duty. These cases break down into three broad categories of:

Misconduct:
Use of the board position to derive profit or otherwise promote personal interest at the expense of the association of its constituent shareholders and unit owners;

Very often trustees on the board will vote in favor of policies which help in the short run, but which, in the long run, will hurt the unit owners and the board. Similarly, they will tend to favor cosmetic renovations over structural repairs.

These measures will make the building look good, however, they often camouflage the real problems, and the delay in addressing these issues frequently results in greater expense down the road.

Vendettas:
The use of the board position as a forum for prosecuting personal vendettas against particular shareholders or unit owners;

Prosecution of vendettas against particular shareholders is also a breach of the fiduciary duty. It violates the board member's obligation to manifest utmost good faith towards his wards. As previously indicated, this duty requires fair and equal treatment of all shareholders or unit owners.

Such an abuse of power violates the fairness aspect of the obligation.

Manifestation of Favoritism:
Manifestation of favoritism among shareholders or unit owners

Manifestation of favoritism towards selected shareholders or unit owners, to the detriment of others, 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 shareholders or unit owners.

Numerous other cases establish that any singling out of a shareholder or a unit owner by board members for disparate treatment (whether favorable treatment to the detriment of others or unfavorable treatment to his own detriment) constitutes a breach of fiduciary duty.


Consequences of a Breach of Duty
The consequences of a finding of breach of fiduciary duty can be severe. First, the offending board member will be held personally liable in money damages for all pecuniary losses sustained as a result of his misconduct. Such judgments (and the attendant legal fees) are rarely, if ever, covered by directors and officer's liability insurance. In addition, courts are not shy about assessing punitive damages against those board members who breach this most exacting of moral obligations.

Finally, the “prudent person standard” or the “ Business Judgment Rule” does not inoculate board action from judicial review when there has been a finding of breach of fiduciary duty.

Thus, the board of trustee(s) action which may be perceived as highly beneficial to the Unit Owners is vulnerable to being struck down by a court when it is implemented in such a fashion that it breaches the fiduciary duty. These adverse consequences can readily be avoided with advance knowledge of the nature and scope of the fiduciary obligation and forethought by board members as to the implications of their conduct.

A Trustee can comply with the standard of due care by following the business judgment rule requirements. Courts will not second-guess a director’s decision that is made with reasonable diligence and is believed to be in the association’s best interest.

The business judgment rule requires directors to:

Be Informed:
Be informed about the association’s business at all times.

Attend Meetings:
Attend and participate in all meetings.

Dissent:
Register a dissent in the minutes and, in appropriate cases, explain that dissent when a director disagrees with an action being taken.

Remain Knowledgeable:
Remain knowledgeable about the declaration, bylaws, rules and other documents essential to the association’s operation.


In most jurisdictions, a Trustee is entitled to rely on the information, opinions, reports, statements, financial data and recommendations prepared or presented by the following qualified individuals:

Management
Management Officers or employees

Legal Council
Legal counsel, independent accountants, or other competent professionals

Committees
A committee of the board on which the director does not serve

Liability
Some ways Trustees expose themselves to liability for a breach of fiduciary duty are as follows:

Failure to secure adequate insurance

Failure to enforce governing documents

Conflicts of interest and self dealing

Failure to maintain the common area

Failure to provide adequate safety measures for common-area facilities.