This blog is the first in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to check back for future posts.
Like directors of corporations, members of association Boards enjoy various protections for the consequences of their business decisions. Essentially, in order for a Board member to be personally liable for an act of the Board, the Plaintiff would have to prove either (1) that the Board acted without authorization from the association’s governing documents, Condominium Act or other statute; or (2) that an authorized act of the Board was fraudulent, unconscionable or resulted in self-dealing. Generally, as long as a Board member acts in good-faith and makes informed decisions, he will be protected from personal liability by operation of the business judgment rule.
An association is comprised exclusively of the unit owners who, through their individual deeds, automatically become members. In essence, an association is responsible for the governance of the common areas and facilities used by the owners of the condominium units. It is a representative body that acts on behalf of the unit owners. Its powers derive from its by-laws, the master deed, and applicable statutory provisions. An association may enter into contracts, bring suit and be sued. The most significant responsibility of an association is the management and maintenance of the common areas of the condominium complex. See Thanasoulis v. Winston Towers 200 Ass’n, 110 N.J. 650, 656-57 (1988).
The Association’s Board of Directors has a fiduciary obligation to its members similar to that of a corporate board to its shareholders. See id. at 657; Siller v. Hartz Mountain Assoc., 93 N.J. 370, 382, cert. denied, 464 U.S. 961 (1983). That obligation includes the duty to preserve and protect the common elements and areas for the benefit of all its members. Kim v. Flagship Condominium Owners Ass’n, 327 N.J. Super. 544, 550 (App. Div. 2000). It is widely accepted that directors of a corporation not only owe a fiduciary duty to shareholders, but also to the corporation itself. See Daloisio v. Peninsula Land Co., 43 N.J. Super. 79, 90-91 (App. Div. 1956) (Directors, when elected to office, become trustees of the entire body of corporate owners. They owe loyalty not only to the majority stockholders, or to the minority, but to all of them, represented by the corporate entity. To disregard the rights of either group, or of the corporation as such, even for a moment, is a violation of their fiduciary obligation).
Accordingly, just like corporate directors have a fiduciary relationship with the corporation and its stockholders, association board members have a fiduciary relationship with the individual unit owners and the association as a whole. See, e.g., Casey v. Brennan, 344 N.J. Super. 83, 108 (App. Div. 2001) aff’d, 173 N.J. 177 (2002) (Corporate directors have a fiduciary relationship with the corporation, and its stockholders); Mulligan v. Panther Valley Prop. Owners Ass’n, 337 N.J. Super. 293, 309 (App. Div. 2001) (The members of the Association’s board occupy a fiduciary position vis-a-vis the Association and the membership).