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 stands in a special relationship or trust, confidence, and responsibility when performing those duties.
The duties owed by a manager of condominium board are similar to those of for-profit corporate boards. Illinois courts apply the "business judgment" rule in assessing the actions of condominium boards. The business judgment rule creates a presumption that the board of managers acted in good faith and in the best interests of the association. Application of the business judgment rule will prevent other unit owners and the courts second-guessing board members so long as they perform their duties in a diligent and good faith manner.
For example, the Act provides that it is the duty of the board of managers to collect assessments from all unit owners, including members of the board. In one case, the board of managers of a condominium was held to have violated their fiduciary duty when they allowed one of their board to become several months delinquent in his assessments.
A recent case should provide guidance for condominium boards. In Davis v. Dyson, the unit owners of an association sued their condo board for breach of fiduciary duty for failure to adequately supervise a property manager who embezzled more than $550,000 from the association by forging a board member’s signature on over 100 association checks. The unit owners alleged the board members breached their fiduciary duty to protect the association in that they failed to review the monthly bank statements and failing to perform a financial review or proper audit.
In the Davis case, the appellate court said the fact the board of managers may have acted in good faith was insufficient to allow the board to invoke the business judgment rule. Rather, the board must show good faith and must exercise reasonable diligence in the performance of their duties. In holding that the unit owners could proceed in their action against the board of managers, the court stated that the board members "may not close their eyes to what is going on about them in corporate business, and must in appropriate circumstances make such reasonable inquiry as an ordinarily prudent person under similar circumstances."
The Davis v. Dyson decision is instructive to Illinois condominium boards but does not increase the risk for members of the board of managers. In determining whether to serve, 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.
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