Is Your Board Carrying Out Its Fiduciary Duty? Know What that Duty Is & What Constitutes a Breach

One of the most distressing issues confronting board members is how to comply with their fiduciary duty to shareholders and unit owners. Although misconceptions abound as to the precise nature and scope of this obligation, a breach of the fiduciary duty could result in grave consequences for both the offending board member and the community which he or she represents. Perhaps the most widespread misconception is that fiduciary duty is related to the degree of competence or zeal with which board members perform their management responsibilities. For example, I have often heard it said that, The board has a fiduciary duty to operate on budget, or, As a board member, he has a fiduciary duty to regularly attend meetings. In fact, 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 a board member's abuse of such power results in harm to one or more of his constituents.

Defining Fiduciary Duty

The essence of the fiduciary relationship is best described in a 1972 court decision which held that a franchisor owes a fiduciary duty to a franchisee:

    ...a fiduciary relationship 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, executors) and those informal relations which exist whenever one man 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 him or her a position of influence and superiority over the person(s) with whom he deals. As such, he is charged with an extraordinary degree of moral accountability to these people. The scope of this moral accountability is most dramatically described by Judge Cardozo in the classic case of Meinhard v. Salmon:

    A trustee (i.e. fiduciary) is held to something stricter than the morals of the marketplace. Not honesty alone but the punctilio of an honor the most sensitive is then the standard of behavior...

Thus, certain types of conduct which might be permissible in the context of ordinary business dealings are off limits to a fiduciary because of the special attributes (i.e. power and influence gained by virtue of the repose of trust) of his relationship with his dependents.The courts have articulated two basic precepts of fiduciary conduct which define the contours of what Justice Cardozo referred to as the punctilio of honor standard: The duty of undivided loyalty by a fiduciary to those under his care; and the duty of a fiduciary to exercise the utmost of good faith towards his dependents. The duty of undivided loyalty basically requires the fiduciary to at all times put his charges' interest ahead of his 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 fiduciary to at all times treat his dependents fairly and ffb equally.

In the context of cooperatives and condominiums, shareholders and unit owners invest their trust in board members by casting proxies and ballots in their favor at the annual meeting. As a result of this, duly elected board members have the power to enact and enforce house rules which profoundly impact residents' daily lives. In certain cases board members have the discretion to levy fines, withhold services, or deny access to building amenities, all of which confers upon them sweeping powers over shareholders and unit owners. Co-op boards' power to prevent or restrict transfers, sublets and financings is yet another striking example of the pervasive control which board members have over the lives of their shareholders. Clearly, trust and confidence has been reposed on one side and there is a resulting superiority and influence on the other side. Thus, board members are fiduciaries to the shareholders and unit owners who have elected them to their position of power. Accordingly, individual co-op and condo 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; use of the board position as a forum for prosecuting personal vendettas against particular shareholders or unit owners; and manifestation of favoritism among shareholders or unit owners.

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71 Comments

  • Excellent and informative! Thank you! I think my condo board may be in trouble on these issue concerning me.
  • Excellent article. This should serve as a guideline for POA's in trouble and internal conflict between the board and membership.
  • very nice where do you get this informamtion?
  • excellent and informative! thank you
  • Great information - thank you! My first question is whether any of the informaiton is state-specific (am interested in IL). Secondly, do you have any recommendations as to how a condo unit owner may protect themselves and their property from this type of abuse in the most cost-effective manner possible.
  • Thank you for the information. This is not readily available and should be.
  • Excellent. Expanding the article to cover the variety of states' interpretations of fiduciary duty would be an interesting sidebar. And, what damages if any are available? Thanks for the info!
  • lanvynguyen@hotmail.com on Wednesday, December 24, 2008 5:15 AM
    what about the Board's responsibility to manage finances properly? After reviewing 4 years of financial statements, I have strong suspicion that the managing office is behaving badly...using misc and suspicious contingency expense accounts to justify raising fees to the tune of $50-60K a year. The people on my board are not well versed so Im certain that board meetings are briefings rather than line by line review of expenses. My request to the managing office about these fees are always ignored. The managing office has 6 people at the office who handles 10 buildings...if all these buildings are charged $50K in misc expenses that would account for $0.5million of cash a year in suspicious unanswered charges. What are my rights to demand information??
  • Does the board also have Duty of Care in addition to Duty of Loyalty?
  • Dear Mr. Cholst, In the fourth paragraph (Defining A Breach of Duty) you mention an appellate court held deferral of repairs could constitute self dealing and thus a breach of duty. Could you please cite the case? We have a similar situation.
  • An follow up as to damages impossed upon rogue board members for using their position to carry out a personal vendetta would be interesting.
  • Very interesting. However, my question goes unanswered. We are a 3 person board. One officer who continually is asking for personal requests to make common area changes, which will improve his unit's quiet, make non necessary embellishments, etc. I feel he is not neutral in his vote.
  • in case of a breach of fiduciary duty by a board member(s), where can shareholders go to or submit a claim?
  • Are board members except from paying condo fees if they own in the association of the board on which the serve?
  • Do you have any specific information regarding an investment committee fiduciary liability for investment of the condo association reserves
  • Nice Article, but you have to Practice What You Preach.
  • Excellent site very informative.
  • condo board gave a $6000.000.00+ contract to their friend without obtaining any other bids
  • We have a President in a cooperative building that has secret meetings and does everything possible to force his ideas of the membership. He is vindictive and yells at owners, "If you don't like what I am doing then SELL & MOVE." What can we do?
  • Excellent article and well worth universal reading by co-op and condo owners and Boards.
  • I live in a condo complex in Illnois that has 4 buildings. Our election for board members is based on the highest number of votes from the 4 buildings. The problem is that the number of units in each building are not equal. For example one of the buildings has 28 units while the smallest building has 11 units and the other 2 have 17units. The building w/ 28 units always dictates what canidates will be voted in. Our governing declaration has a provsion that requires the board to be made up of one unit owner from the 4 buildings. Obviously the original intent of this provision was made to ensure equality across the board and prevent dictatorship. However the board stated this is not in the bylaws period,and provided no explanation.I believe this provision is applicable and has been disregarded and ignored so the dictatorship can continue and dominate the board. What if anything can I do? thx doug
  • Our condo Board now wants compensation. They fired the management company and are self-managing. Can they still be a board and vote on issues without it being a conflict of interest? I would think this is a Standard of Care issue. They inform the membership and do not move motions in open session. Would this be self-dealing?
  • I own a condo in Mountain Bay Condomium in Green Bay Wisoconsin. The officers/owners of the condominium stopped paying their dues and in additions constantly change the original bylaws as they see fit. I also have issues with not return of calls with maintainence issues. They do favor homeowners with respect to maintainence and repair. While I lived with a leaky basement for 10 years they spent 5,000 dollars on a flagstone path in their area of common ground. In addition they continue this behavior which clearly shows misconduct. I have requested to see the books and cost of running the association and they will not allow this. I have voiced the unfairness and they give excuses.
  • My association in MN changes the rules without notice. They currently made a rule that someon can't use certain common areas, but not all common areas. This was meant for a few residents...not all of them. Is that legal in MN?
  • Our association in Florida charges a management fee to rental owners units in the rental pool. We had a rule that allowed owners who rent to give up to two weeks to family or friends without having to pay the 15% management fee. The rule was not enforced very well and was dropped. The management fee collected on rentals helps fund the operating budget. Can the board re-introduce this rule with some modifications to do away with the 2 weeks limit and only charge the 15% management fee if an owner blocks their unit for family or friends during our high rental season (Jan-April and 15th June - 31st July)? Some of the association members have complained that it is not legal to charge a fee to owners when family and friends are given the use of the condo as a gift free of charge.
  • Can a condo board member that is disrespectful to other non-board members be in conflict with his fiduciary duty?
  • Our co-op association in Miami Beach, Florida has recently collected over $250,000.00 in association fees for maintenance and assessments for repairs and has NOT shown a line item budget for disbursements for the maintenance or repair fees. One Board Member and the President have also refused to reveal the contract for repairs (structural and painting) claiming one other Board Member had viewed the contract. The Board Member in charge of repairs has fired two engineers paid to oversee the project. The workers state that they can only repair what is approved by the Board Member in charge. He also swears and abuses members asking questions at meetings. The President allows this type ef behavior because of this Board Members support and refuses questions from members at meetings and has recently refused to accept a registered letter demanding answers to questions asked at official meetings as required by Florida Statutes. Our project was supposed to be completed by the middle August 2011 with penalties for non-completion by a specified date, but the project is still ongoing as of 10/24/11 with no apparent finish date in site. The original contract was set at $95,000.00 but we have collected over $150,000.00 as a result of cost over rides in a contract only a few have seen. The preparation for painting was supposed to be approved by the paint company in association with the engineer as a guarantee of the warranty as stipulated in the contract only a few have seen and the painting has started with no information that the paint company and engineer (?) has given their approvals to start painting. HELP!!!!!
  • jo aultman springdale ohio on Sunday, December 11, 2011 8:07 AM
    the management company that the board hired never responds to emails, the lawn on the side and in the back is never weeded, or cut. the erosion on the hill is so bad we are down to the tree roots holding the hill up. they put mulch down to plant ivy but the rains came and washed it all in the lake. they then had me arrested for removing the ivy and i am forced to pay 1200 in damages. i just received a letter from the association lawyer stating i am harassing the board and the management company with emails demanding they fix the gutters that are over flowing and causing my basement to flood. my husband is deployed and has been gone for 6 years. when he deployed is when the maintenance on the common area around the town-home stopped.. PLEASE HELP
  • Do Condo Board officers have a fiduciary duty to protect a senior woman from verbal and physical abuse from the property management company we employ?
  • Our co-op hasn't been inhabitable for 6 years due to maintenance not fixing a pipe leak>burst causing a flood (asso. agreed, their fault). Since we can live or otherwise collect sell or even rent the place out, can we sue for getting our asso. dues back?
  • thank for this well put together information . my board for some time seems to be favoring certain comunity members and just recently put a board member on with out community a election .
  • Elizabeth - Ohio on Sunday, May 13, 2012 1:39 PM
    The article made clear the fiduciary responsibilities of the board. Thank you for the informative article. The board in my condo development has totally failed in every aspect and has since 2003. Somehow the same board members remain - ballots require names and addresses of condo owners. If one crosses the board, upkeep on condo becomes almost non-existent. Condos of board members and the "favored" get maintenance. This is just the tip of the iceberg. The NH flower case appears minor as to what goes on here. A once wonderful community has been totally destroyed by a most abusive, power- hungry, narcissistic board. We do not have the 75% necessary for removal of board, so the malice and injustices continue to grow by leaps and bounds. A lawyer we cannot afford.
  • A board member embarrassed us at a meeting when my husband was talking calmly and respectfully, he jumped up and said let's take this outside, I"ve been waiting for this! Threatened him and we have it on tape because the association taped the meeting and we have a copy. He made fun of my husband told everyone they could get copies of our letters to the board. We proved he had two bidders formourmrefuge and he asked one to go down $20.00 to meet the other one that he would give) him the contract! Then after he promised this company the contract, this board member changed his mind and went with the other company. That company wrote a letter to our President and confirmed all this. I am in receipt of it!. That was a " tortious breach of contract" and our association could have been sued! This board member was our builder and he ruled around here and had a bad temper? Do we have a case with all the proof? We have a great tape of the whole meeting and threat
  • I have two condos One has a porch which the board calls a common aea that no one except my family can go on. The board told me the only thing i can have on my proch are a table and chairs. No plants. I had to throw away all of my plants. after i trew away my plants i was told i did not have to throw my plants away. .This is months latter and now becuase they said i could have my plants. the board wants topick my pplants out. They said they have final approval, They told me if the board can see into my condo from the window they can force me to close my drapes! the condo rules said state that i can have follage pn my porch. The management sides with the board and stated"the board has final approval over every aspect of the condomiminium. One lasdy changed the whole look of the outside of the condo without the boards approval and i can't have flowers and shrubs! They have never tikd this to anyone else.
  • Do you advise governing documents prohibit a board member voting on an issue that is directly impacting that member? or should they be required to obstain? Thanks! Great article!
  • Can the president of our (719 cooperative) give our office worker a $300.00 per month increase in pay without discussing the increase with the rest of the board of directors
  • condo board in bed with employee by paying for salary yearly when no winter work is performed. what can be done?
  • I am on the board and I made a motion to "dissolve at will" the sanctioning of the Neighborhood Watch Committee and I was outvoted. I have researched this and the sanctioning put us in a postion of liability and I couldn't make anyone understand and was actually yelled at by the self appointed head of the NW Committee. He slandered me in front of other board members and the property mgmt. co. Was I right in asking for this for the protection of our homeowners?
  • Our board of director has her daughter living with her who is not 55. We have a rule that guests may stay up to 3 weeks within a 6mos period and 6 weeks within 12 mos period. She has not disclosed her situation with anyone else on the board including the president. Her daughter has been there for over a month. The president has been told and will not confront her. How do I handle this situation? Thank you.
  • After being vilified by the NW head in our community to "dissolve at will" the NW Committee and slandered me by saying that I was a danger to this community and that I have admitted to carrying a concealed handgun and had a seizure and should report the concealed handgun (which I do not have) and seizure to the police or it is a felony! Further stated I am on so many meds that I am a danger (I am not). He sent these statements to me in an e-mail as well so - libel. Now he wants the board to "dissolve at will" the NW Committee! He says it will be advantageous to the committee financially! Why am I not surprised that when it comes to money he has reversed his position. They engage people and run them out of the community and have told at least one resident he is not to go out at night to retrieve his mail and he is being watched because they think he is doing and dealing drugs. They carry 5 ft. long inch thick poles and pepper spray and threaten people with it!
  • Our new Board President hired a forensic accountant to prove his allegations against the previous management company. The Board had no say in this hire. It, to me is a breech of fiduciary duty. I am not sure where to go tho get justice? Housing Court.
  • Thank you very much for the in depth article. I am specifically intrigued as to how a two person board is able to act with regards to a Right of Frist refusal when only the non-selling owner can vote and does so to retain the property that he then intends to purchase himself instead of allowing the family that is under contract (that the Attorney agreed would be a great asset to the building) to buy it. I see this as a clear act of self-dealing but I am finding it hard to find specific terminology relating to this situation. Any guidance would be very much appreciated.
  • i want to replace my very old outside air conditioning unit. The board says I have to repaint and cover the pre-exsisng unit . I am handicap & saving the as soc by replacing the heating & air conditionor at my expence. Should I be reponsibdexi
  • I'm curious about the boards obligation to plan for reserve funding needs. In our particular situation we are underfunded based on the most recent reserve study; however, at our most recent annual owners meeting, the board chair led everyone to believe the current funding was adequate and advised owners to vote against the required reserve contributions. What action can be taken to address this situation and the misdirection of the board chair in maintaining that the reserve funding was more than adequate at its current levels?
  • My co op board has had 2 rules for its shareholder. Shareholders that purchased their apartments in the year 2003 and after ate not allowed to sublet. Shareholders that have purchased their units prior to 2003 are allowed to sublet. this was challenged by a shareholder who purchased her unit after 2003 and had to move to France on a job. She wanted to sublet her unit and was refused by the board. the lower court dismissed the case in favor of the Board. However, the Appellate Court has ruled in favor of this shareholder, stating the co op cannot have 2 sets of rules for shareholders. This was ruled by the Appellate Court on 19th November. The Board has not informed the shareholders as yet. They have advised me today that they will be doing so in mid to end January 2014. Can you advise if this Board is liable for a fine by the Appellate Court if they keep delaying their compliance with the Appellate Court ruling? thank you! i am gld I found this website today!
  • We have a total of 14 shareholders. 3 years ago 100% of the shareholder voted to self insure and access for a wind fund which has been completed and funded, now one of the shareholder wants his money back and is asking that we buy insurance. Can he enforce that?
  • Is an uninsured club house (common area) In violation of 'fiduciary duty?
  • Can a shareholder allow another shareholder to reside in her apartment? In our case, I lived in the unit for years but now live out of the U.S. The other shareholder agrees to water plants and care for the apartment, and pay maintenance. The board knows and likes her, but refuses this. She is young and just starting out and needs the place; I need the place watched. It's bad to leave it empty, as well.
  • Can a board member give a professional opinion and not have professional liabilty coverage and can he/she recommend people he or she knows for jobs? Would the board member have to recluse him or herself?
  • who would I contact to have a specific question answered?
  • I sit on what can only be called a dysfunctional board. They constantly abuse their power at the detriment of shareholders. They recently rejected a sale of a 3rd floor unit because the price was 10 percent below a unit in the same line 15 stories higher, despite the fact that the unit had been on the market for several months. All these guys care about is preserving the value of their own units, regardless of the consequences to their neighbors. Point is-- co-op boards are just as dysfunctional as their reputation says they are, and board members are not particularly smart, and are all about serving their own interests.
  • What obligations do the trustees have to maintain common area property, aside from structural maintenance? The property is a 3-level 120 unit garden-type condominium. development. Do trustees have an obligation to maintain the interior aspects, ie, carpets, walls, ceilings. lights, etc. Do the trustees have an obligation to maintain resale values for all unit owners.
  • Very informative article and refers to the Board Members. Does this also apply to the building property manager, who is employeed by a managing company? What are his Fiducary duties. Is it right that the building manager makes up lies to shareholders about me, harrasses me, verbally threatens, makes my personal health information public to others?? Should't he be held to the same standars as the Board Members and have some type of consquences? Our board is a joke, it's mainly run by one person who continues to protect our building manager therefore enabling his bad bahviour to me. Please advise
  • Can one board member spend money from resevers without the entire entire board approval?
  • Can a person serve in 2 positions on a condo board in chicago
  • Can our elected officials back date approval of a change in rules and regulations as they failed to make the motion and take a vote? Also does this change need advance notice to unit owners and if approved, notice to unit owners of action taken.
  • what does ffb mean? - used 3 times in article
  • Would it be considered fiduciary duty, if someone who is in charge of a company would like to raise money for a local school in return for ability to advertise the company product? or is that violating the law?
  • Our dictator hoa president has exhibited over-controlling leadership, and self-centered judgement. Re-election is coming up next month. I have informed the other owners of solid examples, but I feel like I am an unwelcome messenger spoiling the "fun" around here. Many owners would prefer to keep their heads in the sand and pretend things are ok. Hope the re-election changes things around here, as there are a few people who would be willing to serve if their names are written in on the ballots. Unfortunately their names could not be typed on the CA ballot, as they prefer to work on their team and they cannot run on a ticket. They will NOT work with current President, as she is such a hostile person (who is relishing the power of being current President). Wish our assn luck in a fresh start. I've done what I can, but can now just wait and see.
  • I was able to get hold of the Mater Insurance Policy and discovered the President made himself the payee. I had to contact the La Insurance Commission in order to get his name replaced and to make the Payee The Condo Assn. He ended up with over half million in flood insurance (Katrina (05) and placed the contract to rebuild our condos with his son. The workmanship and materials used were sub-standarded section 8. This was a 20 units....600 sq ft...10up/10 down. He did not even inform owners that they had the right to hire their own contractors. I asked the insurance agent (State Farm) if the condo president made any other claims that we may not have been made aware of.....He said go ask your condo president for that info. I call the St of La Insurance Commission and asked them to intervien and they told me they had no power to do this....go hire an attorney.
  • Our condo president is in contact with a financial advisor not part of our board. We have zero reserves because our budget was overspent by $107,000. This communication is being done secretively. The president is pushing towards the owner's acceptance of Zero reserves. Is this legal?
  • My deceased mom's condo's HOA has no rentals. I am on my mom's mortgage now stuck with the property. The mortgage company says I have rental property which I cannot rent due to the HOA's rules against renters. I asked them to allow me to rent the unit property values increase and I can sell the unit. They will not allow me to rent and I know there are renters in the building. Also, they have foreclosures in the building. It seems that the HOA is breaching their fiduciary responsibility, by not allowing rentals in certain circumstances- which puts people in foreclosure and further decreases property values. My mom's unit is empty since she died, and the mortgage company will not allow a short sale, so I have to foreclose, which of course hurts my credit, etc. What can I do regarding the HOA, because they will not let me rent the unit, I do not live in the unit and cannot continue to pay the mortgage and assessments, this practice of not allowing rentals is putting me into financial ruin and also has decreased property values. Any recourse?
  • How does one proceed to defend themselves against a board president that it trying to get a superintendent fired without merit 10 years on the job and no complaints. other then he refuse to take orders from this president because management hired him
  • Can the complex manager impose a gag order on the board members not to discuss the complex owners financial matters since we are the ones who pay the financial monies? Had thought only a judge could. Know already the manager is doing some things not legal (by word of a board member)
  • This articel was extremely helpful toward the situation I am currently in. Thank you.
  • We choose our new Trustees 8 years ago and from there we have more personal vendettas coming through to the owners and we have more trouble that anything. I assume that if you are a Trustee you can handle people like rubbish and you don't have to comply with any rules. I also want to be a Trustee
  • Board wants to spend $1,000,000 over the $100,000 limit imposed by the by laws. Can they do so.
  • Who oversees the proper functioning of the HOA Board? Can complaints be submitted to the State of North Carolina?
  • Equity and Justice on Sunday, June 14, 2015 4:11 PM
    Too much legal jargon. How about equity and justice? Something needs to be done with these Property Owners Associations Board of Directors miss use of power and no help from the DBPR or those that have made these STATE STATUTE that are supposed to regulate these Board of Directors but are not being up-held by our own STATE.
  • I suspect foul play by either or both my condo board and property manager. It seems there isn't much recourse for homeowners other than hiring lawyers--and for what? Forcing a board and property manager to do their jobs correctly? As this is a common problem in HOAs across the nation it seems like it's time for regulation at the federal level.
  • If a shareholder speaks to the President & VP of the board and happens to share a health condition. And later on they lose reelection and find out that shareholder did not vote for the and the President goes on a rant telling others of that shareholders condition including new board members is that considered a breach of confidentiality fiduciary duty?