Q&A: When Conflict of Interest Runs Amok

Q. What do you do when the president of the board, property manager and super are all one family? I tried waking up the shareholders with memos and flyers about the conflict of interest to no avail. Our beautiful Garden of Eden has become ridden with drugs and more renters than actual shareholders residing here. A real estate owner who doesn’t live here but serves on the board has been selling and renting out apartments. The parking wait list is a big secret and not seen by shareholders to see if seniority is followed -- which it isn’t. The management company attached a  hold harmless clause to their contract due to the conflict of interest to protect themselves. But what about us? Who’s got our backs when it comes to following laws, policy and procedures?

—What Has Become of Our Community

A. “A condominium or cooperative board must satisfy its fiduciary duty to the association and its membership,” says attorney Scott A. Rosenlund of Fullett Rosenlund Anderson PC, which has offices in Lake Zurich and Chicago. “The fiduciary duty includes a duty of loyalty and a duty of care. The duty of loyalty requires that when acting in their capacities as board members and officers, individuals place their loyalties to the association above all other interests. Board members must make good faith decisions based on what is in the best interests of the building as a whole, and put aside their own interests. The duty of care requires that board members exercise their duties with such care as a reasonably prudent person in the same situation would use.

 “Illinois law generally requires disclosure of association board member conflicts of interest and that a board member recuse him- or herself when the board votes on a matter specifically affecting that board member. The precise conflict of interest requirements which are applicable will depend on the type of association.

“The simplest potential solution to these types of issues is for the association members to make a concerted effort at the time of the next board election to elect responsible board members who will operate the building in a professional manner and fulfill their fiduciary obligations. In serious cases, the association members can initiate board removal efforts. The exact procedure for board removal will depend upon the type of association and the requirements of the association’s governing documents but will typically require a supermajority vote of the association members. Under extreme circumstances, association members can initiate litigation against board members who willfully disregard legal requirements. However, such litigation should only be employed as a last resort, as board member defense costs (to the extent not covered by insurance) and/or insurance deductibles are usually funded as a common expense of the association. Furthermore, litigation of this nature can have an adverse effect upon the marketability of units and the overall reputation of the building.

“As for the community management firm, management takes direction from the board. In other words, management’s role is to implement decisions made by the board. If the members of the association elect board members who make prudent business decisions, management will carry out those decisions. The same principle applies to association employees who are given proper direction based on sound business practices. With respect to the hold harmless requirement, it is customary for management agreements to provide for an association’s reasonable scope of indemnification of management personnel.

 “In summary, concerned association members should be proactive in electing like-minded board members. Once an effective board is in place, proper association business operations should subsequently follow.”

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