A condominium association is governed by an elected board of managers (called “managers” under Illinois law rather than “directors” as in a for-profit corporation). A condominium unit owner who agrees to serve on the board of managers, whether to protect his investment or out of a sense of duty, must understand that he undertakes certain legal responsibilities and obligations. Under the Illinois Condominium Property Act (the “Act”), a condominium board is required to exercise the care required of a fiduciary of the unit owners. A“fiduciary” is a person who acts for the benefit of another person and as a result has a special relationship of trust, confidence, and responsibility when performing those duties.
When agreeing to be a board member, one must understand the consequences of board decisions could result in personal liability for the board members. In one Illinois case, the Appellate Court held that a condominium board had committed constructive fraud on a unit owner by imposing unreasonable requirements on the unit owner in connection with the reconstruction of her unit. The board’s constructive fraud constituted a breach of their fiduciary duty to the unit owner, and the individual board members could be held personally liable for damage suffered by the unit owner.
Illinois will allow the personal liability of board members to be limited to willful misconduct if the condominium declaration so provides, but such limitation language will be narrowly construed. In the case mentioned, the declaration provided exculpatory language that stated the individual members would not be liable except for gross negligence or fraud. The court held that this exculpatory language did not protect the managers from personal liability.
Another Illinois case involved a condominium created in 1980, but for which the developer did not begin to sell units until 1992. The purchasers of the units discovered there were serious problems with the structures and parking lots and that the developer had failed to adequately fund the association’s reserves during the 12 years the developer rented out the condos. The unit owners sued the board of managers for breach of their duty – imposed by the Act – to provide adequate reserves for replacement. The board members who had acted from 1980 until the association was turned over to the unit owners in 1993 were all appointed by the developer. The plaintiffs alleged that the individual board members failed in their duty to attend meetings for the purpose of determining adequate reserves. The Appellate Court held that the unit owners had pleaded sufficient facts in their complaint to state a cause of action against the individual board members. The court also held that the duty to fund the capital reserves began in 1980.
Managers and prospective managers should make certain that the association has in place directors and officers’ liability insurance and must ascertain that the association’s by-laws have been updated to include manager indemnification provisions permitted by the Act. Please do not hesitate to telephone us if you have any questions regarding your responsibilities as a manager of your association or if you would like us to review your condominium by-laws or otherwise advise your board of managers.