3.06 Business Responsibilities of the Council of Co-owners

• Library: South Carolina Community Association Law: Condominiums and Homeowners Associations (SCBar) (2019 Ed.)

3.06 Business Responsibilities of the Council of Co-Owners

The business function of the council is one of providing service: maintenance of the property;⁴¹ supervision of employees;⁴² negotiating contracts; keeping books and records; setting budgets; and acquiring insurance.⁴³ It is a corporate management function.⁴⁴

A. Fiduciary Responsibility

The SCHPA provides a limited definition of the business responsibilities of the council of co-owners, however, generally the principles of fiduciary obligation and business judgment applied to corporate directors also apply to the governing board of a condominium. Those standards would of course be employed if the association is incorporated, however, even in an unincorporated association, the officers and directors are frequently held to the fiduciary standard in corporate law through condominium legislation.⁴⁵ There is no reference to fiduciary duty in the SCHPA, however the standard is widely imposed by case law.⁴⁶

In general, a fiduciary relationship imposes a duty to act primarily for the benefit of another.⁴⁷ It is this aspect of the fiduciary duty that leads courts to give great scrutiny to contracts between the developer and a developer controlled association or council of co-owners.⁴⁸ The courts of South Carolina have said that a fiduciary relationship exists when "... one reposes special confidence in another so that the latter, in equity and good conscience, is bound to act in good faith and with due regard to the interests of one reposing the confidence."⁴⁹ It has been said that in the condominium context, a fiduciary duty requires strict compliance with the condominium instruments.⁵⁰ Where a fiduciary duty has been breached, the injured party has a tort action with damages being those proximately resulting from the wrongful conduct of the defendant.⁵¹ When a person is no longer a board member, his or her fiduciary responsibility generally ends for subsequent actions.⁵² Courts may enjoin illegal or fraudulent acts of board members, but, said a New York court, they can not prevent persons qualified to participate as board members from doing so. They may only enjoin specific acts.⁵³

It has been suggested that the unit owners may contest the competence of action taken by the board in such a way as to require contradictory proof from the board.⁵⁴ Boards of directors have, however, found protection in the business judgment rule.⁵⁵ As the South Carolina Court of Appeals said in Dockside Ass'n v. Detyens, "... the governing board [of a condominium non-profit corporation] is entitled to have the validity of its intra vires action tested by the 'business judgment' rule."⁵⁶ Under the rule, derived from corporate law, as long as a board acts in a reasonable manner, its business judgment is protected from challenge.⁵⁷

In Fisher v. Shipyard Vill. Council of Co-Owners, Inc. ,⁵⁸ the South Carolina Supreme Court extensively discussed the business judgment rule. It rejected the idea that mere existence of governing documents precludes application of the rule, that the documents apply instead of the rule or that governing documents and the rule are mutually exclusive. It then said that while the rule protects a corporation's exercise of its best judgment when deciding between viable options, it is "not a cloak that protects a corporation from a violation of its own bylaws." Further, it said the rule only applies where a corporation acts within its authority, without corrupt motives, and in good faith.

In Dockside,⁵⁹ the court said it was error to apply the business judgment rule so as to require the board to establish its good faith, rather than place the burden on the challenger to demonstrate lack of good faith. In the condominium context the rule has been applied to rule-making decisions⁶⁰ as well as to those that might more traditionally be classified as business judgments. The rule, however, does not exempt the board from having any reason for its actions⁶¹ nor does it protect the board where it fails to plan for necessary repairs,⁶² or acts in bad faith.⁶³ Generally, reliance on the advice of counsel supports application of the business judgment rule.⁶⁴

Because the positions of officer and director in a condominium are voluntarily assumed and generally uncompensated, officers and directors may not take their responsibilities as seriously as do directors ofbusiness corporations. However, the voluntary status does not lessen the requirement of good faith and due care in managing the council's affairs. One commentary has suggested that:

The greatest possible source of liability is mismanagement, and the officers and directors must realize that they can be held personally accountable to the organization for mismanagement. The officers and directors are also liable for the failure to manage, and the delegation of authority to a manager who fails to act or who acts improperly does not diminish the potential liability of the ones in whom the ultimate responsibility reposes — the members of the board.⁶⁵

In a Texas case,⁶⁶ a group of unit owners sued the members of the board of administration individually for "...controlling the affairs of the [condominium] for their own personal gain and [for mismanaging] its affairs and [misapplying] its funds."⁶⁷ They sought damages and an injunction. The trial court granted both, but the appellate court overturned the damages, holding that the plaintiffs lacked standing to represent other co-owners. The court did find standing with regard to the injunction and recited with approval the items made subject to it, among which were:

(1) A prohibition against using co-owner's funds to conduct private business of any co-owner.
(2) A prohibition on purchasing comprehensive insurance at a higher rate than required for a condominium in order to meet needs associated with rental units in the project.
(3) A prohibition on operating and controlling the affairs of the condominium to maximize income received by co-owners from leasing units.
(4) A prohibition on expenditures of co-owners' funds for repair of the interior of leased units.
(5) A mandatory injunction requiring the condominium to be managed in accordance with the Texas Condominium Act and that co-owners' funds be expended and accounted for in accordance with good accounting practices.

⁶⁵ Hyatt and Rhoads, "Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations," 12 Wake Forest L.Rev. 915, 944 (1976). Consider Pooser v. Lovett Square Townhomes Owners' Ass'n, 702 S.W.2d 226, 231 (Tex.Civ.App. — Houston 1985). The trial court decided that "[s]o long as a condominium association or board of managers has acted reasonably in the exercise of its duties under the condominium declaration, a condominium owner is not entitled to recover damages, or to avoid maintenance assessments because of his disagreement with the action taken by the association or board." The appellate court affirmed. See also Board of Managers of Weathersfield Condominium Ass'n v. Schaumberg Limited Partnership, 717 N.E.2d 429 (Ill.App. 1999) (failure to properly exercise fiduciary duty may result in individual liability).

⁶⁶ Scott v. Williams, 607 S.W.2d 267 (Tex.Civ.App. — Texarkana 1980).

⁶⁷ Scott v. Williams, 607 S.W.2d 267, 231 (Tex.Civ.App. — Texarkana 1980).

A governing board must be careful to act within the bounds of the condominium documents or risk having its actions declared ultra vires ⁶⁸ For example where the bylaws required the association to either receive approval at a meeting of unit owners or written consent from all owners for action of the type it contemplated, failure to receive approval in either manner rendered the board action ultra vires and therefore void.⁶⁹

Governing boards also need to exercise considerable caution when asked by a potential purchaser about the condition of the building. Failure to disclose, or to respond truthfully to questions about the building may subject the board to an action for fraud.⁷⁰

B. Delegation of Management Authority

Management responsibilities in condominiums are frequently delegated to a management firm. Sometimes the contractual relationship is established before control of the council is transferred from the developer to the purchasers and the management firm is a subsidiary of the developer or related in some other way to the developer. Regardless of when the contract is entered, the question of proper delegation of authority can arise. In Sunnyland Management Corporation v. Murray Hills Ass'n, Inc.,⁷¹ a trial court held that a management contract was void and unenforceable. While the appellate opinion failed to specify a reason for affirming the lower court, its final sentence clearly implied a basis for the decision:

The contract involved herein virtually divested the appellee, Murray Hills Association Inc., of any authority whatsoever. The extent of the transfer of authority is made even more apparent by the claim of the management company, the appellant herein, that it did not even have an obligation to account to the appellee association for the expenditure of association funds.

⁶⁸ See, e.g., Seabrook Island Property Owners Ass'n v. Pelzer, 292 S.C. 343, 356 S.E.2d 411 (Ct. App. 1987) (business judgment rule does not apply to ultra vires acts of corporation). See also Lion Square Phase II and Phase III Condominium Ass'n, Inc. v. Hask, 700 P.2d 932, 934 (Colo. App. 1985) (association may exercise powers only within constraints of condominium declaration and bylaws; where association actions were not in accordance with declaration, assessments were ultra vires).

⁶⁹ Bramson v. Beau Monde, Inc., 415 So.2d 761 (Fla. 2d DCA 1982) (written consent from some, but not all, owners insufficient to save board's action from being voided).

⁷⁰ D'Ambrosio v. The Colonnade Council of Co-owners, 717 A.2d 356 (D.C.App. 1998) (unit owner's complaint alleging fraud for failure to respond truthfully to pre-purchase inquiries about...