Q&A: What If a Board Member Is Involved in a Lawsuit?

Q. Can a homeowner who is in a lawsuit with his condo legally be an executive board member of that condo? Wouldn’t that annul his fiduciary duty?

The story: One of our homeowners was elected to the board of managers last November; his fellow investors did not know he was in a lawsuit with the condo. Now the homeowners are signing a petition to have him removed from the board as they found out about it, because he and two other homeowners in separate lawsuits have generated considerable legal fees, causing our common charges to be raised 5 percent, and the capital assessment from 17 percent to 20 percent. Moreover, the enclosure is breaking a house rule (The board filed a lawsuit against the person’s elderly parents about three years ago regarding an enclosure on the terrace they put up in 1979; finally, the court ruled last year that the enclosure had to be taken down by the unit holder).

Related to the lawsuits, particularly to that of the board member, is the failure of the board, which he is a part of, to disclose the legal fees at open board meetings as is required by generally accepted accounting principles (GAAP). The board kept it from the homeowners to avoid having to explain this financial disaster would have exposed the lawsuits, particularly the one of its own, the secretary.

So, can this board member be removed from the board with a majority of homeowners’ votes, as per our bylaws? Or do we risk being sued by him, as one homeowner warned, because being a board member is an official position?

Also, since I am running the petition, I was told that I libeled the board member. Is that true? The petition only carries facts, no defamatory language whatsoever. I only speak the facts when asking homeowners to sign. 

                                        —Taking a Stand

A. “The issue is not whether the board member may serve legally, for that is only one of qualifications,” says attorney Phyllis Weisberg of Montgomery McCracken Walker & Rhoads, LLP, which has offices in Pennsylvania, New York, New Jersey, and Delaware. “The issue is whether he should serve, since the board member may not be able to fulfill the fiduciary obligations of a board member. 

“Thus, board members owe a duty of undivided loyalty to the condominium and its unit owners.  They are at all times supposed to act only in the best interests of the condominium.  Moreover, board members should hold themselves as examples to the community and abide by all the rules.

“To have a lawsuit pending against the board suggests that this individual may have run for the board to advance his personal interests – and perhaps to seek revenge for the prior lawsuit concerning the terrace enclosure.  While in theory this person could recuse himself from all discussions that relate to his situation, in practice it would be better if such a person did not serve on the board, particularly where, as the questioner states, he is in violation of a house rule.

“Condominium bylaws typically contain a provision that permits unit owners to remove a board member (usually for cause) by a specified vote – either of a majority or a specified super-majority.

“That the questioner is seeking to avail himself/herself of the rights under the bylaws should not subject him or her to liability.

“Finally, the questioner refers to an obligation to disclose the legal fees in accordance with GAAP.  It is unclear to what the questioner is referring.  Typically, the legal fees incurred would be set forth in the annual financial statement, certified by an accounting firm.  That financial statement would typically not only disclose legal fees incurred, but also contain footnotes discussing pending material litigation.”

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