Monday, February 8, 2010

Does a board’s failure to pursue delinquencies constitute a breach of fiduciary duty?

A reader recently wrote to me and asked whether or not his board’s failure to timely pursue delinquent owners would constitute a breach of fiduciary duty. A fiduciary duty is the obligation to act in the best interest of another party. Whether or not a board’s decision to not pursue a delinquency and to rely on a special assessment against paying members to make up such deficit remains an issue of great importance to discuss with association counsel. There are many factors to take into account when deciding whether or not to move forward with the association’s foreclosure action.

Boards in today’s market would be well advised to re-examine their current collection policy and to tighten up those procedures. If, in the past, the association has given three notices before proceeding to send the file over to the attorney for collection, in light of today’s harsh economic realities, clinging to that policy will only allow the delinquency to balloon out of control. Moreover, if the association fails to file a lien timely, it is possible that the owner may file for bankruptcy protection in which case the association without a lien becomes an unsecured creditor, virtually guaranteed to collect nothing.

Tightening up collection procedures to meet today’s challenges does not need to suggest that the association act heartlessly or without due consideration. It remains a mystery to me, however, when I meet with boards who have allowed an owner to remain delinquent for well over a year without taking any action whatsoever as to the thought process behind such inaction. Paying owners have every right to expect the board to take prompt action to secure the association’s assessment stream.

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