Being elected to the board of directors of a condominium association or  cooperative comes with a great deal of power, and with that power also comes a  great deal of responsibility. Whether they serve a condominium association or  cooperative community, board members have a responsibility to govern and make  decisions on behalf of that community—a burden often referred to as the board's “fiduciary duty.” Decisions made on behalf of their fellow residents must be made in good faith,  with the best interests of the community firmly in mind, and violating this  duty can lead to legal consequences for boards and individual board members who  stray.  

 Fiduciary Duty in a Nutshell

 The fiduciary duty in the condominium association or cooperative board context  arises out of the special relationship that exists between directors and the  shareholders and property owners who place their trust in these directors. A  fiduciary relationship can be formed in other types of relationships such as  attorney/broker-client, or even clergyman-congregation member.  

 “Most community associations in New Jersey are corporations. Each officer and member of an association board therefore owes a fiduciary duty—a duty of trust—to the association and its individual unit owner members,” says Eric F. Frizzell, a partner with the Glen Rock-based law firm Buckalew  Frizzell & Crevina LLP. He continues, “This duty is comparable to the obligation that a corporation's board of  directors owes its stockholders and includes a duty to preserve and protect the  common elements and areas for the benefit of all of the association’s members.  

 “This fiduciary relationship also requires that a community association board act  consistently with New Jersey law and the association’s own governing documents,” Frizzell continues. “A board must act in the best interests of the whole association and its unit  owners, not out of personal interest, fraud, self-dealing, or in an  unconscionable, arbitrary, discriminatory, or bad faith manner.”  

 “A fiduciary duty arises when one person places his trust in another person and  as a result of that act of faith, another person gains a position of power and  influence such that he is in the position to hurt the person who places faith  in him,” says attorney Bruce Cholst, a partner with the law firm of Rosen Livingston & Cholst LLP, based in Manhattan. “At that point, he has a special legal obligation, which would not otherwise have  existed but for the fiduciary duty, to refrain from doing anything that  violates his fiduciary’s interest.”  

 The concept is the same for both condominium associations and cooperative  boards. “In New Jersey, condominium associations are commonly incorporated pursuant to  the Nonprofit Corporation Act, and co-ops are incorporated pursuant to the  Business Corporation Act. The overall, basic fiduciary duty of board members in both kinds of associations  is virtually identical,” explains Frizzell.  

 “Trustees who serve on a cooperative board have the same responsibilities to the  members of the association. They are to discharge their duties in good faith  and with that degree of diligence, care and skill which ordinary prudent  persons would exercise under similar circumstances in like positions,” says New Jersey lawyer Thomas Vincent Giaimo, a partner with the law firm  Giaimo & Associates in Rumson.  

 Thus, the fiduciary duty in the condominium association and cooperative board  context illustrates the special responsibility that trustees have, given their  position of influence over the property and lives of the shareholders and unit  owners. The act of faith shareholders and property owners place in trustees is  represented by their votes and proxies for board members at the annual meeting,  explains Cholst. With that act of faith, shareholders and property owners trust  that board members will look after their best interests and refrain from  abusing their power.  

 Breaching Your Fiduciary Duty

 So what exactly does it look like when a board member breaches their fiduciary  duty? A great majority of the time, the business judgment rule protects most board  action taken in good faith. “In making decisions for the community they serve, governing boards are to use  their highest and best form of business judgment,” says Giaimo. “The proper exercise of business judgment in many instances serves to insulate a  board from a claim of breach of fiduciary duties.”  

 “Directors of an association are not expected to be incapable of error,” explains Frizzell. “As noted frequently by New Jersey’s courts, all that is required is that persons in such positions act reasonably  and in good faith in carrying out their duties. Courts will not second-guess  the actions of directors unless it appears that they are the result of fraud,  dishonesty, or incompetence.”  

 That said, according to Cholst, real-life breaches of fiduciary duty really just  boil down to abuses of power. From his practice, he has seen that potential  breaches of fiduciary duty fall into these categories: self-dealing, indulging  personal vendettas, and selective enforcement of rules and regulations, and a  failure to protect the community’s assets.  

 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. “The failure of a board member to subordinate his personal interests to those of  the association or its constituent shareholders and unit owners is called  self-dealing,” explains Cholst.  

 The most obvious case of self-dealing is when a board member steals money from  the co-op or condo’s reserve fund. However, self-dealing is often more subtle than outright theft.  

 “The vast majority of boards of associations that our law firm represents are  well aware of their fiduciary duty to their members, and strive to fulfill that  obligation,” Frizzell says. He continues, “Years ago, however, in a hotly contested election, an incumbent board wanted to  surreptitiously allow a sponsor to cast his many votes at the annual election,  with the knowledge that the sponsor would vote for the incumbents and assure  their re-election. I advised the board that the sponsor was limited by New  Jersey law to appointing one representative to the board and could not vote for  unit owner directors. The board persisted in its contrary position and relented only after I explained  to them in the firmest terms that such conduct would not be condoned.”  

 Personal vendettas. Another abuse of power and breach of fiduciary duty can  occur when an individual 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 miserable for those people, and  when they use it, that too is a form of self-dealing, certainly an abuse of  power, and breach of fiduciary duty,” explains Cholst.  

 Cholst provides the example from his practice of a board member, head of the  alterations committee, who was in an ongoing feud with his neighbor over loud  parties the neighbor had and his refusal to quiet down. That neighbor submitted a request to do an alteration for his apartment, and the  board member persuaded his colleagues to reject the alteration, since there was  no legitimate reason for the decision other than to indulge 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  board member plays favorites in enforcing building rules and regulations.  Cholst explains that in order “to act in good faith and in a way that’s consistent with those to whom I owe a fiduciary duty, I can’t favor one board member at the expense of another; I have to treat everyone  equally. For example, if I have a friend who wants to put an enclosure on his terrace, I can’t say ‘yes’ to him and then ‘no’ to somebody else who wants to put the exact same kind of enclosure on the  terrace. I have to enforce the rules consistently and avoid what legally is  called “selective enforcement.’” Another example of selective enforcement is if the building has a no pet  policy, but a board member looks the other way when a dog comes into the  building belonging to a friend.  

 Failure to protect assets. Another area that board members and trustees can run  into a potential breach of fiduciary duty is if they fail to have reserve  studies performed. “Governing boards are charged with the responsibility of adopting and  implementing a responsible association budget which covers not only operating  expenses but expenses which are to be anticipated for future major replacements  of the components which comprise the association's property (roofs, roadways,  siding, etc.),” explains Giaimo.  

 “In order to quantify the expenses for those future major replacements, governing  boards are responsible to periodically have an engineering evaluation performed  in order to calculate the remaining useful life of those components and the  cost to be incurred by the association in replacing those components. This is  referred to as a ‘reserve study.’ The failure of an association's board to have those reserve studies  periodically performed can be the basis for a claim of breach of fiduciary  duties. The failure of the board to have reserve studies performed and  periodically updated will result in the association having to levy an  assessment to its members in order to fund major replacement projects.”  

 Consequences

 “Obviously, the existence of fiduciary duties upon a governing board and its  members carries with it the potential for claims allegedly arising from  breaches of those duties,” Giaimo says. “Trustees that serve on governing boards are to be held harmless and are to be  indemnified by the association unless it has been determined that the actions  of the board and/or trustee amounts to gross negligence or willful misconduct  or that the trustee was involved in self-dealing.”  

 If a board member is found to have breached his or her fiduciary duty, the  consequences 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,” explains Cholst. Cholst further explains, “Courts are not shy about assessing punitive damages against those board members  who breach this most exacting of moral obligations.”  

 These severe consequences can be avoided if board members educate themselves on  their special responsibilities as fiduciaries and take all necessary  precautions.  

 Protect Yourself

 The last thing most volunteer board members want to become involved with is a  lawsuit claiming they have breached their fiduciary duty. An example of  self-dealing that can be easily avoided is in the context of interested  directors. If a board is deciding to hire a professional such as a lawyer,  accountant, or property manager or company that offers services such as  security, telecommunications, or interior design, and a board member has an  interest in one of these companies, special precautions must be taken in order  to avoid a breach of fiduciary duty.  

 “On occasion a member of the governing board may have a conflict of interest with  an issue being discussed or considered by the board,” explains Giaimo. He continues that board members or trustees “who believe they may have a conflict of interest should immediately disclose  that conflict or potential conflict with their fellow board members. Whenever  there is a conflict of interest or even the appearance of a conflict that  member should remove him/herself from further discussions of the board and by  all means not participate in the board’s decision. Many times and in an effort to educate a trustee as to his/her  responsibilities to both the association and to the governing board, a board  will request their legal counsel to prepare a "Trustee's Code of Conduct." A  properly prepared Code of Conduct will address not only conflicts of interest, but the appearance of impropriety  as well.”  

 Another action boards should take is to be careful about enforcing their rules  consistently, says Cholst.  

 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 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.  

 “All governing boards and community association managers should be encouraged to  seek counsel whenever a claim or threat of a claim has been received or is  perceived. Governing boards and trustees that serve on those boards in  discharging their duties are not to be held liable if, acting in good faith,  they rely on the opinion of association counsel,” Giaimo says.  

 Being on one's board can be a tough job for a host of reasons—not least among which is the fact of fiduciary duty to the community at large.  Knowing the breadth and depth of that duty and upholding it are two of the most  important traits a board member can bring to the table.  

 Elizabeth I. Robbins, Esq. is a New York lawyer and legal writer for The New Jersey Cooperator.