Fiduciary Duty and the Community Association: Understand Your Risks

By Steven P. Blonder

Illinois law is clear that the officers and board members of condominium and homeowners (community) associations owe a fiduciary duty to the owners, or members of the association. They must act in a manner reasonably related to the exercise of that duty, and the failure to do so will result in liability not only for the association but also for the individuals themselves. But what if you are a developer or an owner? The law here becomes much less clear.

One consideration, however, is beyond dispute. The board's exercise of its fiduciary duty requires strict compliance with the association declaration and bylaws. In other words, the first place to turn is the legal documents establishing and governing the association. Breaching one of those provisions is a surefire way to incur liability, no matter what your relationship is to a community association.

From time to time, a board will choose to promulgate a rule restricting the use of property by members of the association. In these cases, the board must affirmatively show that the use it wishes to prohibit or restrict is antagonistic to the legitimate objectives of the association. When a use restriction is adopted by the board alone or requires the board to exercise discretion, the restriction will be upheld by a court only if it is affirmatively shown to be reasonable in its purpose and application. Moreover, the board must enforce its rules in a way that does not deprive any unit owner of the use and enjoyment of his or her residence. As is the case in a corporate setting, the actions of an association board are protected only if the board can demonstrate that each member exercised sound business judgment. The difficulty for board members is that they bear the burden of demonstrating the reasonableness of their actions. In other words, there is no presumption that they have acted reasonably or appropriately.

Developers may also be at risk, given their often complex relationships with the projects they develop. In addition to their basic construction responsibilities, developers are required to form an owners association to manage and operate the property. Although the developer appoints the initial board of directors, owners are subsequently elected to the board as units are sold. During this interim period, developers assume many of the same responsibilities and risks of an association board made up of owners. As a result, a community association may seek to impose liability on the developer for various situations at a building. This is particularly true for "hazards" that were only "discovered" after the developer completed the project. Developers, meanwhile, are apt to point fingers back on association boards, claiming that they created the nuisance that is subject to dispute.

Despite this propensity for finger-pointing, there are ways to reduce liability and manage risk if you are a board member, a developer or even an owner. Most importantly, all parties should know and understand the rules set forth in the by-laws and association declaration. If you carefully consider these documents before taking action or making decisions, you will be less likely to find yourself in a dispute. In addition, experienced legal counsel can help you navigate the potentially complex waters and live up to your fiduciary duty.

As a skilled advocate whose practice focuses on complex business litigation, Steven P. Blonder has argued successfully before the Court of Appeals for the Seventh Circuit, and possesses a record of consistent success in motion and trial practice, both jury and non-jury, in state and federal courts. His litigation practice is primarily centered in the areas of real estate and business issues, financial services, corporate governance control and securities. Steve can be reached at 312.521.2402 or sblonder@muchshelist.com.

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