All
common interest communities, including condominium associations, are
corporations or have all of the rights, powers, and duties of a
corporation. The Illinois Condominium
Property Act imposes all of the powers, duties, and obligations of an Illinois
corporation on all condominium associations.
Corporations are operated by their directors and officers. In associations, generally the directors do
even more than is done by other corporate directors. They perform all of the functions on behalf
of the association, although they may delegate specific tasks to the officers
or to others. Association members are
like shareholders. They have an interest
in the corporation as a result of their ownership. They do not run the association. They do not conduct the association
affairs. They cannot control the
association's activities.
In
Illinois and generally, fiduciary duties imposed upon board members include two
(2) components. The first component is
undivided loyalty. The second component is
reasonable business judgment in conducting the business affairs of the
association.
Undivided
loyalty means that each board member must view what is needed by the
association and/or in the best interest of the association. They cannot look at their own needs,
perceptions, or beliefs. They cannot
look at the needs, perceptions, or beliefs of other owners. They are required to look at the needs and
requirements of the association, as set forth in its documents, as set forth by
statute, or as necessary in order for the association to continue to accomplish
its purpose.
Undivided loyalty may mean
that a board member votes for an increase in assessment or for greater reserves
even though the board member personally cannot afford to pay the increased assessment. Similarly, a board member must vote on
matters where the board member believes it is necessary or appropriate, even
though many, and sometimes all, owners do not wish to see the association
proceeds with that which is being voted on.
Reasonable business judgment in conducting the business and
functions of the association is the second requirement of fiduciary duty of
directors. Each director must understand
the association business and must actively participate in that business. Each director must analyze each activity of
the association, determine what is necessary or required for the association to
operate, and then must vote with other directors to perform that function. Each director must exercise independent
judgment and knowledge in performing each and every activity. That means they must understand the activity
to be performed, must understand the choices and options available with respect
to that activity, and then must use reasonable business judgment in determining
which choice or selection is appropriate with respect to each activity. For example, securing three (3) bids from
three (3) separate contractors on specific work is not mandated anywhere in any
law. However, it is a reasonable
approach by a director to determining what is a fair price to pay for
work. Of course, the director must be
certain that all three (3) bids are based upon the same work. The director must understand that the specifications
for the work are the same or substantially the same. The director must carefully review each bid
and submission to confirm they are the same and that the director is making an
equal comparison. That is acting in a
reasonable and business like fashion.
Each director should understand that when they are representing an association,
they cannot summarily choose a course of action or hire someone based upon
their sense that they like someone. They
cannot summarily sign a quotation, which obligates them to pay for something
but may not impose any obligations on a seller.
They must have a review of the documents by their attorney. They must contract using contracts that
protect the association adequately, and they must utilize all resources
available including management, lawyers, accountants, engineers, and architects
to provide input and assistance that is necessary in order to effectively make
business judgments. They cannot delay
excessively or ignore obligations. The
fact that these matters may cost money does not change or eliminate the need to
perform those functions. The operation
of an association by its directors is not something that is accomplished using
only the sweat equity of the directors, or by the seat of the pants of the
directors, or by doing nothing. To do so
exposes the directors to charges of breach of fiduciary duty, and to liability
for failing to adequately act in the interest of the association.
In addition to the general standards and requirements set
forth above, the Condominium Property Act, the corporation act, and most
declarations set forth specific duties to be performed by the association
through the board of directors. The
Condominium Property Act sets these duties out specifically at Section 9,
Section 18, and Section 18.4 of the Act, although some duties are set forth at
other portions of the Act. Common
interest communities that are subject to the Act have specific duties set out
at Section 18.5 of the Condominium Property Act. In addition of course, all declarations set
forth specific duties to be performed by the board. Section 18.4 (a) through (q) is a good
listing of the duties and is restated in part as follows:
1. To provide for the operation, care,
upkeep, maintenance replacement, and improvement of the common elements.
2. To prepare, adopt, and distribute
the annual budget.
3. To levy and expend assessments.
4. To collect assessments from unit
owners.
5. To provide for the employment and
dismissal of personnel necessary or advisable for the maintenance and operation
of the property.
6. To obtain adequate or appropriate
kinds of insurance.
7. To own convey or otherwise deal with
the units or lots.
8. To adopt rules and regulations
regarding the use of the property.
9. To keep detailed accurate records of
the receipts and expenditures affecting the use and operation of the property.
10. To have access to each unit from
time to time as necessary for repair and maintenance of the common elements.
11. To pay taxes or other special
assessments.
12. To impose charges for late payment
and to levy fines for violations of the declaration, by-laws, rules and
regulations the association
Failure to perform these functions adequately or timely in a
reasonable and business like fashion would be a breach of duty by the board
members as a matter of law.
Directors have a special duty to the association that
they operate. In Illinois the directors
have a fiduciary duty to comply with specific requirements in the
declaration. If the board members fail
to comply with the clear declaration requirements, they can be held in breach
of their fiduciary duty. This principal
was stated in a case dealing with an association's alleged failure to proceed
in accordance with the first purchase option requirements in the
declaration. Illinois law requires that
directors cannot do anything that would interfere with the ability of the
association to accomplish its purpose.
Doing anything which interferes with the association's ability to
accomplish its purpose is a violation of the directors' obligations as a matter
of law. This principal was set forth in
a case where the developer board did not adequately reserve on behalf of the
association.
In
all associations, there are officers in addition to directors. Generally, the directors elect the
officers. The directors, by vote at
board meetings, vote on substantially all activities of the association. The officers carry out their specifically
authorized duties, and also see to the day to day functions of the association
as directed by the board or as necessary to continue to operate the
association. In a condominium
association, they are elected only from among the directors so that each
officer is also a director. Each
association should have at least a president, secretary, and treasurer.
The
president conducts board meetings and annual meetings. That does not mean that the president
controls the meeting. The entire board,
including the president, functions at a meeting. The president handles the day to day
activities of the association dealing with management, vendors, other officers
and directors. The president's function
includes signing contracts as directed by the board and overseeing or
supervising all business activities.
The
secretary's duty is to maintain the business records of the association. The secretary may take minutes or may have
them taken by another. However, the
secretary keeps the minutes, other business records, and documents and maintains
them for the association. This would
include, in addition to minutes, all other corporate papers, all contracts,
correspondence, communications, insurance, unit owner files. Basically, every association document is kept
by the secretary. Of course, these
documents are, more often than not, maintained by management. However, the secretary has responsibility for
them and for directing management with respect to maintaining all business
records of the association.
The treasurer maintains all of the financial records and
documents of the association. Again,
most often these documents are maintained by management. However, the treasurer does have authority
over all financial records of the association.
The treasurer may or may not have signatory on financial accounts of the
association. The treasurer may or may
not have signatory authority alone or in conjunction with one or more other
officers or directors, including the president.
The treasurer may have signatory authority along with other officers
and/or management. Whether the treasurer
has signatory authority or not, the treasurer is responsible for those
accounts. Similarly, the treasurer is
responsible for any other savings accounts, certificates, or any and all funds
of the association. The treasurer's
function is to keep track of and report on the financial condition of the
association at each board meeting and at the annual meeting. The treasurer reports income, expenses,
balance sheets, and all other financial information. The treasurer reports transfers in financial
resources. The treasurer presents to the
board options and alternatives with respect to investment of funds, and acts at
the direction of the board with respect to investment of association funds, but
within the parameters that are allowed by investing on behalf of associations. The treasurer oversees all financial books,
records, all accounts receivable, all accounts payable, the general ledger, all
income, and all expenses. It supervises
management, if any, or any other personnel in these activities and reports on
these activities to the board.
In summary, the board of directors run the association
on behalf of its members. The officers
conduct certain activities and functions at the direction of and on behalf of
the board and report to the board. Board
members have fiduciary duties to the association, which cannot be avoided. The board members must always act in a manor
that is in the best interest of the association. The board members cannot do anything which would
interfere with the ability of the association to perform its function. Each board member must perform their
functions and duties as a board member with undivided loyalty and a reasonable,
prudent, and business like fashion.
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