A condominium, cooperative, or homeowners’ association elects a board for a specific purpose: to manage the community’s day-to-day business, oversee special projects, and draft and uphold the rules and regulations that keep life orderly and harmonious. In fact, the board has an inflexible fiduciary duty to act in the best interests of the community as a whole.
This means that boards have an obligation to stay consistently on the side of good, advocating for residents and promoting neighborly well-being – and most boards do just this. However, boards are made up of humans, and humans are wildly fallible. Having sampled even a morsel of power, some find themselves starving for more; oftentimes other less malicious folks simply make mistakes, and rather than correct them, keep on stumbling down a wrong path.
Once a board crosses over to the dark side, it can mean serious consequences for not only its members, but every owner or shareholder in the building or HOA. Infighting, backstabbing, loss of funds, declining property values, and even legal consequences may well ensue if the ship isn’t righted.
As Henry A. Goodman, a principal at Goodman, Shapiro & Lombardi, LLC, a law firm that has offices in Massachusetts and Rhode Island, puts it, “In any organization, things can go wrong; either by virtue of error in judgment, human frailty, or even corruption of one sort or another.”
It’s imperative that both boards and residents be aware of the reasons and signs that an operation has gone bad, in order to avoid the former and correct the latter as quickly as possible.
Board members of residential communities rarely view their position as an opportunity to head a criminal enterprise. When blunders occur, it’s usually due to ignorance of the rules, or an unwillingness to alter ill-advised behavior that has simply become habit.
“In Illinois, a majority of appellate court decisions in which they’ve found a board or members thereof to be in breach of fiduciary duty have been because the board failed to adhere to the covenants of its declaration or the rules and regulations,” says attorney David Hartwell, a founding partner with the Chicago law firm of Penland & Hartwell. “One of the big problems is that a fair number of board members, either when they take their position or even throughout their time serving, have not fully read through the declaration and rules and regulations. So many times I get a call from a board member asking ‘Can we do this?’ And the answer lies within their documents; they just haven’t read them. You can’t know whether you’re within the boundaries if you don’t have a clear view of what those boundaries are.”
When it comes to board business, this type of ignorance is anything but bliss. “I have found that the boards that are operating improperly are rarely doing so due to malice,” notes Michael E. Chapnick, a shareholder with the Florida-based law firm of Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, PA. “It’s usually due to ignorance of their duties and obligations. They’re simply unsure as to what they’re allowed to do, what they are not, how they’re allowed to do a thing... and sometimes it comes down to simple education. Board certification courses certainly help.”
A board can err by doing something as seemingly minor as failing to notify owners of a rule change. “Sometimes a board will adopt or amend a house rule, and, rather than send a formal notice, they’ll send an email, or simply begin enacting the rule,” explains attorney Stewart E. Wurtzel, a partner with Tane Waterman & Wurtzel, P.C., in New York City. “Then, when down the road it comes time to enforce this rule, the fact that they didn’t follow the corporate documents can become a problem. Say that the documents specify that a notice must be sent by certified mail; they may spend an excessive amount of time litigating over a fine or a rule change that they simply failed to notice properly. It’s not usually malicious; they just feel as if they always did something a particular way, and it’s a minor issue until it’s actually enforced.”
Other board transgressions manifest due to relationships – or lack thereof – within the community. Showing favoritism toward friends, aggression toward rivals, or letting those with whom one does not want to deal at all act out unchecked are examples of this. It’s the board’s responsibility to treat everyone in their association fairly, and it’s a slippery slope once a board starts straying from this basic tenet.
“I’ve seen cases where a board has allowed board members – and only board members – the privilege to sublet,” says Andrew D. Stern, also a partner with Tane Waterman & Wurtzel. “Needless to say, this leaves corporations vulnerable to claims of disparate treatment and unreasonable conduct, and this can expose them to liability.”
“Boards, especially in bigger buildings, will occasionally look the other way when dealing with a direct neighbor who is breaking the rules,” admits Keith Hales, president of Hales Property Management in Chicago. “Obviously, this isn’t fair to everybody else. And then there’s the flip side of that, where someone they don’t like steps over the line, and the board throws the book at that individual.”
Hales also warns against a recent trend he’s seen of conflict-averse boards. “Boards don’t want to pick up the phone or talk to a person,” he says. “Nobody wants to call someone to see what’s going on regarding a particular incident and maybe squash it. I’ve found that all you have to do a lot of times is reach out, and you can solve 90 percent of the problems – especially with things like noise issues. As a manager, I’ll get calls saying ‘We have noise; you guys need to do something about this,’ and my response is ‘Have you gone upstairs? Have you knocked on the door? Have you told them that the noise was somewhat bothersome, and asked them to turn it down?’ And they’ll reply that it isn’t their problem. But yes, it actually is. They’re adults, and they’re not in a rental building. They’re an owner in a condo property, just like all of their neighbors. You get people hiding behind a manager or an attorney, and that’s when fireworks start. It just fuels animosity between both parties, and then you escalate it to the board, and when they don’t want to deal with it, it spills over. Then you have people wasting time and money because someone didn’t want to turn off their music.”
Abuse of Power
Sometimes board members can just get way out into the weeds, blatantly ignoring clearly stated rules. While these transgressions may arguably provide the most engaging anecdotes, they’re also the most destructive to the fabric of a building or association community.
“You’ll see with some frequency instances where an officer or president runs the board as if it’s a one-man show,” says Wurtzel. “They’ll refuse to approve an applicant solely because they don’t like them, dismissing a board vote. Or they’ll approve contracts without proper bidding or full documentation; without backup. And of course, if they’re hiring someone’s friend as a contractor who’s not as independent as they should be, things can get even worse.”
“I knew of a board where for years, unbeknownst to anyone, the president was embezzling enormous sums of money,” relates Hartwell. “The property manager eventually noticed various anomalies via the building’s accounting, and called out this president. That property manager was abruptly fired. Then the next property management company was so happy to get a big account, that they were unwilling to call anybody out on the carpet.”
And occasionally board transgressions can reach late-night cable levels of tawdriness. In one building, “A board member invited an employee of the condominium to her home for lunch,” recalls Goodman. “When the employee arrived, she indicated that she was for lunch, and asked him if he liked what was on the menu. An affair ensued – until the wife of the worker got wind of it. The worker quit his job and indicated that he was going to sue the board for sexual harassment. This was a case of vulnerability and ignorance of the consequences of a board member’s actions.”
Citizens on Patrol
So what authority does the owner or shareholder have to check a board that has violated its trust and neglected its duty?
“The owners’ or shareholders’ power relies on the association’s transparency,” says Stern. “To the extent that it’s possible, the shareholders should be reading minutes and developing a relationship with the managing agent. An absence of transparency is often considered a red flag. To an extent, these organizations are representative democracies, and there is a limit to how much an individual shareholder or unit-owner can supervise their board’s activity. Needless to say, in almost all of these organizations, audited financials are distributed to owners and shareholders annually, and to the extent that they’re able, they should be reviewing these documents. Should money start to disappear, that’s another red flag.”
Chapnick urges residents to consistently attend board meetings. “Listen up, and understand what’s happening,” he says. “If you don’t follow something, ask questions. If you can’t get answers from your board, ask your property manager. Understand what the law is, and how it applies to your community. That starts with the declaration, the articles, the bylaws, whatever the relevant statute is.”
Truth and Consequence
Of course, it doesn’t fall entirely on the owners or shareholders to police their board. Should a board willfully disregard the rules for long enough, it can face serious personal, financial and legal consequences.
“There’s a mechanism that allows a unit ownership to remove a member from serving on a board,” says Hartwell. “The board itself can’t do it; it has to go to a vote of the unit membership. Board members can also be held personally liable, without indemnification coverage from association or coverage from the directors and [officers] insurance policy. And sometimes the mistakes can leave them on the hook for hundreds of thousands of dollars.”
Some offenses, like misappropriation of association funds, can result in criminal charges, depending on local statutes. “The best way to handle this type of financial issue is to begin with a records request,” suggests Chapnick. “Examine the association’s official record, get copies of the budget, get copies of the check registers; just follow the money. Understand who is using what, and by what right they’re doing it. Once you’ve compiled that, if you believe that there’s evidence of fraud, theft, self-dealing, etc., take your account to the police department’s economic crimes division.”
“Being on a board is about administering a multimillion-dollar asset, and members need to have that mindset when they agree to serve,” Hartwell summarizes. “Because it’s serious stuff. When you start doing things that could materially affect a unit owner’s property value, they’re going to come at you with pitchforks and spears. So you better make sure that you’re doing it correctly.”
Mike Odenthal is a staff writer/reporter for The Cooperator.