This post originally appeared on tBL Marketplace Partner R. Kymn Harp's blog - HARP - on this and is republished with permission. Find out how to syndicate your content with theBrokerList.
As an active participant in the Chicago area condominium deconversion world, I hear a lot of nonsense from Board Members and their attorneys. To be clear, I don’t represent condominium boards. I represent investors acquiring condominium units on the path to condominium deconversion, and, occasionally, Unit Owners fighting with their Board of Managers to stop a sale and deconversion.
On the surface, this sounds like two incompatible client constituencies – but is it? I don’t think so. Here’s why.
Whichever party I represent in connection with a proposed sale and deconversion of a condominium property, my objective is to abide by the mandates of the Condominium Property Act (the “Condo Act”) and the case law interpreting the Condo Act. I take very seriously the fiduciary duties owed by Board Members to Unit Owners, no matter which side I represent. When I represent Unit Owners contesting Board action, fiduciary compliance (or lack thereof) by Board members is often at the heart of the dispute. When I represent investors interested in acquiring condominium property for deconversion, my interest in fiduciary compliance by Board members is equally focused, recognizing that the failure of Board members to abide by their fiduciary duties to Unit Owners may place the transaction at risk of expensive failure.
There’s a lot of controversy surrounding Section 15 Sales of condominium property. Section 15 is the provision of the Condo Act that allows a super-majority of unit owners to force a minority of unit owners to sell their condominium units whether they want to or not. We refer to that as a “Section 15 Sale”. I have written about it frequently on this blog.
The fact is, there is a correct procedure to pursue a Section 15 Sale, and many incorrect ways. For reasons that escape me, condominium Boards and their attorneys often ignore the the correct procedure and, instead, pursue shortcuts of one sort or another, or simply structure the transaction in a foolish way that exposes the Board of Managers to liability. This happens much more frequently than one might imagine. It doesn’t need to happen, and shouldn’t happen nearly as often as it does.
At the root of the problem is the exaggerated belief that Board Members have a virtually absolute say in all things related to a condominium association. To be honest, when it comes to general operational issues that is to a very large extent true. But there are occasions when that it not true, and pursuing a Section 15 Sale happens to be one of those occasions.
As I have written at length in prior posts on this blog, the decision to sell land and units on behalf of all Unit Owners is a decision reserved to the unit owners, not to the Board of Managers. It requires compliance with Section 18(b)(13)(iii) of the Condo Act, and with Section 15 of the Condo Act (and in Chicago, with the Chicago Condominium Ordinance). Note that I joined those requirements with an “and” not with an “or“.
For reasons entirely inconsistent with rules of statutory construction long recognized by Illinois courts, condominium Boards and their attorneys have repeatedly argued that Section 15 of the Condo Act is independent of virtually all other provisions of the Condo Act. Through this argument, they have asserted that they can pursue a Section 15 Sale without complying with Section 18(b)(13)(iii) of the Condo Act, and without complying with the condominium association’s own bylaws. They have ignored the language of the Condo Act providing that powers reserved to the Unit Owners (like deciding whether to sell condominium property on behalf of all Unit Owners) are powers excluded from the Board (even though the Condo Act clearly provides otherwise); asserting, instead, that it is up to the Board to decide whether to pursue a Section 15 Sale, subject only to final approval by the Unit Owners. Boards and their attorneys have ignored the fiduciary duty owed by each Board member to be fully transparent to Unit Owners while pursuing a Section 15 Sale, arguing that naked compliance with Section 15 supersedes those fiduciary duties.
In each case, they have been wrong.
In the first Illinois appellate opinion to directly construe the issue, the Second District Appellate Court in Katie Kai, et al v. The Board of Directors of Spring Hill Condominium Association, et al 2020 IL App (2d) 190642 clarified at paragraph 19 that, in fact, that “the common law of fiduciary duty remains in full force and applies to the bulk sale of condominiums under section 15.” And at paragraph 27 “. . . section 15 does not purport to rewrite the common law of fiduciary duty; as we have noted, section 15 does not itself mention fiduciary duty and thus cannot be read to place limits on the common-law scope of that duty. Accordingly we reject the defendants’ argument that their sole fiduciary duty was to comply with Section 15 and that they were free to disregard the common-law duties of fidelity, loyalty, and care.” (Kai, supra, at paragraph 27; internal citations omitted).
In discussing the fiduciary duty owed by board members, the Court reiterated that “condominium association board members owe a fiduciary duty to other unit owners” and that “condominium association board members had “strict duties to treat the unit owners with utmost candor, rectitude, care, loyalty, and good faith – in fact, to treat them as well as they would treat themselves.” (Kai, supra, at paragraph 25; internal citations omitted).
As if to put an exclamation point on the issue, the Court noted at paragraph 36 of the Kai opinion that “[punitive] damages are potentially available when a transaction involved a breach of fiduciary duty, and they can be an appropriate avenue of relief . . .”.
Somewhat obviously, the biggest obstacle to Unit Owners enforcing their rights against condominium Boards and their individual members is the disparity in available funds to fight back. Boards, often in a further breach of their fiduciary duty, use condominium association funds as a war chest to bankroll their oppression of Unit Owners seeking to stop Board member abuse on the path to a Section 15 Sale. Ultimately, a legislative solution may be the best answer to solve this problem. In the interim, however, with the growing body of Illinois case law reaffirming the fiduciary role of Board members vis-a-vis Unit Owners – and especially now, with the Kai court’s clear expression that the fiduciary duty of Board members extends to bulk sales of condominium units pursuant to Section 15 of the Condo Act – other avenues exist. With the Kai court’s new and clear recognition of fiduciary duties owed by Board members in respect to Section 15 Sales, the whole body of case law granting relief against breach of their fiduciary duties is in queue for use in challenging wrongful Board action. This relief may include, among other relief in a proper case, liability for reimbursement of wrongfully expended funds, disgorgement of wrongfully received funds, and punitive damages, which may include attorneys’ fees as an element.
A day of reckoning for Board members who cavalierly ignore their fiduciary duties to Unit Owners may be dawning. And if they are relying on faulty advice from their association counsel in breaching their fiduciary duties, indemnification claims from Board members for legal malpractice may not be far behind.
Thanks for listening,