With the recent publication of the case of
Palm v 2800 Lake Shore Drive Condominium
Association, the First District Appellate
Court put Cook County condominium associations on notice of a number of key
issues that impact their governance. Before we embark on an analysis of the
case, it should be noted that the findings in the Palm Order are specific to
the governing documents and facts at issue in that case. With a few exceptions,
the court’s conclusions confirm what should have already been common practice
in the industry. In other instances, the court’s conclusions are surprising and
require discussion. Below is a brief road map of the complicated Order:
Conducting
Business in Closed Sessions
The Palm Order states that the phrase “conducting
board business” in Section 2(w) of the Illinois Condominium Property Act (“ICPA”),
that defines a “board meeting,” encompasses discussions by a gathering of a
quorum of the board. Notably, the court found that this includes activities by a
board in what are commonly referred to as “workshops” where boards meet to
discuss, but not vote on, association matters. This is an expansion of what was
otherwise the understanding in the industry as to what constitutes a board
meeting, and as to the use of workshops where no decisions are made. Under the
Palm Order, not only must all board voting occur at meetings open to owners, so
must all board discussion or consideration of association matters, except for
discussion or consideration of the three specified exceptions set forth in
Section 18(a)(9) of the ICPA. Accordingly, notice must be provided for, and
owners permitted to attend, any gathering of a quorum of the board where
association business will be discussed or considered. This includes workshops
attended by a majority of the board, even if no vote is to be taken.
Importantly, votes on matters permitted to be discussed or considered in executive
session must be taken at meetings or portions thereof open to owners.
Voting
By E-Mail and Canvassing of Board Members
E-mail voting/decision making or written
canvassing of board members to make decisions is not permitted under Section
18(a)(9) of the ICPA. These decisions must be made at meetings of the board for
which notice has been issued and open to owners. This impacts decisions even as
routine as whether or not to waive an association’s right of first refusal.
While surprising to must board members, this has long been the law in Illinois.
The ICPA requires that decisions of the board, and any vote on matters
discussed in meetings or portions thereof permitted by law to be “closed” to
owners (“executive session”), be made at board meetings, or portions thereof,
open to all owners, called on at least 48 hours prior notice. E-mail should not
be used for the purpose of discussing any association matters. E-mail should be
used as a substitute means of delivery for what might otherwise be delivered by
mail or in person (other than for items, like notices of meetings, that must be
mailed or personally delivered—unless the party entitled to notice has agreed
to accept notice by e-mail).
Emergency
Decision Making
The ICPA governs the forum in which
decisions of the board of managers are to be made. The ICPA requires that
decisions of the board, and any vote on matters discussed in meetings or portions
thereof permitted by law to be “closed” to owners (“executive session”), be
made at board meetings, or portions thereof, open to all owners, called on at
least 48 hours prior notice. It must be noted that neither the ICPA nor the
Palm Order provide for emergency Board meetings called on less than 48 hours’
notice, or for informal Board decisions (emergency or otherwise) to be made
outside of duly called and held bard meetings—these actions could be deemed a
breach of fiduciary duty.
Board
Vote on Contracts/Delegation
In Palm, the association’s declaration
granted the board authority to delegate its contract power to a management
company. The association’s management agreement permitted the managing agent to
enter into certain contracts with approval of at least three officers of the
board. The association’s declaration authorized the board to allow the
management company to enter contracts on behalf of the association. However,
there is no authority for the board to delegate power to the management company
to enter contracts with approval by less than the entire board. The board has
two options: It can either (1) delegate the power to enter contracts without
board approval or (2) delegate the power to enter contracts with full board
approval (meaning it must be considered by the full board). The Palm Order also
calls into question the use of board appointed “commissions” to do the board’s
business in the absence of express authority in the declaration, and notes that
any business of the board must necessarily be conducted by the entire board.
With these issues in mind, each association must review its governing documents
to determine what can and cannot be delegated.
Transferring
Surplus Association Income to Reserve
In Palm, the court found that the board
breached its fiduciary duty by transferring surplus income to the association’s
reserve account at the end of the year. The court stated that the board should have
credited the surplus against unit owners’ future assessments, as required by
the declaration in Palm. This finding was based on specific language in the
declaration for that association. To determine if this is finding is relevant
to your association, a close review must be made of the governing documents.
Commingling
of Operating Funds and Reserve Fund
In Palm, the board breached its fiduciary
duty by using the operating fund to pay reserve expenses and reimbursing the
operating fund from the reserve. Therefore, bills should be paid from the
operating account and not the reserve account. Expenditures for items for which
the reserves account is established need to be paid from the reserve account.
Notice
Procedures
In Palm, the association’s declaration
required that all meetings of the board be mailed to owners no later than 48
hours prior to such meeting. The association’s practice was to mail notice of board
meetings to nonresident owners, but to deliver such notices to resident owners
by leaving the notices in front of the unit owners’ doors. Notices, based on the
language of the declaration, must be mailed to owners and not merely left at
the owners’ doors. Therefore, under its existing governing documents, the board
breached its fiduciary duty in failing to mail all notices of board meetings.
General
While the above information outlines the
major issues raised in the Palm Order, contrary to popular belief, the sky is
not falling. Boards should work closely with their management and legal counsel
to craft a working plan on the day to day function of the Association. There is
no “one size fits all” way to address the points raised in the Palm Order. In
most cases a review of existing association governing documents and operations
will help your attorney, management and board decide what may need to be
changed to avoid similar claims to those raised in Palm.
Michael G. Kreibich
No comments:
Post a Comment