What is a Fiduciary Duty and Do Board Members Have One?
Simply put, a fiduciary duty is when one party must act in good faith on behalf of another. The unique nature of this relationship imposes a special trust or confidence in the acting party on behalf of the other. For example, a director of a corporation owes a fiduciary duty to shareholders of the corporation, just as doctors owe a fiduciary duty to their patients, and lawyers owe a fiduciary duty to their clients. A fiduciary relationship exists where there is a special confidence imposed upon a person who is bound to act in good faith with regard for the best interests of another.
A fiduciary duty requires a person to act with honesty, loyalty, in good faith, and with the best interests of another in mind. Community associations are by their very nature, not-for-profit corporations. Once incorporated, the legal entity commonly known as “not-for-profit corporations” is the form in which they take. Much like corporations, unit owners are elected to serve on the board of their association. Some, if not most, board members also serve in an officer position (e.g. President, Treasurer, Secretary). Owners of units within the association are similar to shareholders of a company insomuch as they have a vested interest in the preservation and wellbeing of the association. Board members have a legal obligation imposed upon them by operation of law to act in the best interests of the unit owners and the association at all times. While most association governing documents require board members to act as a fiduciary on behalf of association members, section 18.4(s) of the Illinois Condominium Property Act also requires officers and members of a board to exercise the care required of a fiduciary on behalf of the unit owners.
YES! Yes, board members have a fiduciary duty imposed upon them whether they are aware of it or not. Importantly, failure to act in a manner in furtherance of this fiduciary duty may result in liability not only for the association, but also for the individuals serving on the board. Illinois courts have previously stated that this fiduciary duty requires strict compliance with the governing documents of an association. This fiduciary responsibility does not require board members to know everything about operating a community association as no one person has that level of knowledge. It does, however, require board members to secure proper advice before making a decision outside their area of expertise.
For example, when determining the type and amount of liability and property insurance to purchase on behalf of the association, board members should consult with a knowledgeable insurance agent or broker for guidance. Similarly, board members would be well served to consult an architect before devising renovation plans for the common area lobby or pool. Finally, it would be prudent for board members to consult with legal counsel before interpreting association governing documents, signing contracts, or making decisions about particular covenants or rules.
Understanding one’s fiduciary responsibility and acting appropriately at all times while serving as a board member may be challenging. Oftentimes board members face difficult decisions with competing interests and little experience making such decisions. For example, a board may have a reserve study that benchmarks how much in reserves the association should have as of 2021. The board recognizes it is significantly below the recommended reserve amount. This reserve shortfall may cause the board to consider levying a special assessment to raise capital for unanticipated repairs of major mechanical components.
When evaluating this decision, the board must consider all available options for raising such funds. It must also conduct a risk/reward analysis. Its analysis involves balancing two competing interests: 1) increase the association’s reserve contributions – which means a budget increase - to avoid levying a special assessment; or 2) leave the annual reserve contribution as is and carry the risk associated with a failed building component.
On the one hand, the board is undoubtedly aware that an increase in the operating budget will be met with harsh skepticism from the owners and cause acrimony. On the other hand, the board knows failing to increase its reserve contributions will likely result in a future special assessment when a building component fails. What should the Board do? This is a difficult decision for any board to face with strong competing interests to balance. The “best” and “correct” decision is not always crystal clear.
Whenever faced with difficult decisions like the one above, board members should ask themselves a single question: “Am I taking into account the best interests of the entire association by casting my vote this way?” While it seems obvious, putting the best interests of the association before one’s own is often the hardest decision to make. Humans are hardwired for survival, which dates back to prehistoric times. Human behavior causes us to think of ourselves before others. Pumping the brakes on this instinctual tendency and honestly answering the above question usually yields positive results for association boards. It also ensures board members fulfill their fiduciary duty and allows them to sleep soundly at night.
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