Friday, August 13, 2010

Think twice before picking that legal fight!

How often have you heard of owners being whipped up into a frenzy about community issues without having the benefit of either all the facts or good legal advice before proceeding to court?

A recent case has been added to the list where a group of owners sued their Association and its Board members for breach of fiduciary duty. The owners complained about several things, including the handling of money received after Hurricane Wilma and the holding of secret meetings by past Boards. In this 4th District appellate case, the court stated that “the genesis of this litigation” was the response by the Association post Hurricane Wilma. The complaint claimed “a variety of Board activity following hurricane Wilma” was improper. Several owners sued for breach of fiduciary duty for eight different violations. The trial court ruled against the owners on all counts.

The appellate court reversed this ruling because the sole basis for the trial court’s decision on six of the eight counts was that the owners had failed to first take the Association to Arbitration. However, breach of fiduciary duty claims are not subject to arbitration before the Division so the trial court erred in this regard. As to the only two counts that the trial court ruled on the facts, it ruled against the owners and the appellate court agreed.

The first concerned the allegation that the Board held “secret meetings” without notice and involvement from unit owners. The owners could offer no evidence that the current Board engaged in this practice, only prior Boards. The court noted that the Association’s Board members were almost entirely new, and that without evidence that this practice was continuing, the owners could not prevail on their claim seeking an injunction to stop secret meetings. Therefore, Judgment against the owners on this point was upheld, even though prior boards may have had secret meetings. The other count that the trial court ruled on dealt with alleged misallocation of funds, and as the court stated was part of the crux of the complaint. The owners claimed certain insurance money should have been spent elsewhere. The Board responded that the insurance company went bankrupt, and the money received was not spent where the owners wanted because in the Board’s determination, those areas suffered minimal damage. The Court ruled that the owners’ claims were all based on speculation, disagreement as to how the money should have been spent, and without sufficient proof that funds had been misallocated. Therefore once again, judgment was entered in favor of the Association and the Board Members.

There are several “take aways” from this case. First, breach of fiduciary duty claims are not claims subject to arbitration and lawyering is important. This error may have cost the Association a complete win. Second, lawsuits are serious, and if you are going to sue your Board for wrongdoing, be sure you have proof of what you are alleging in your lawsuit. Finally, courts appear to be tiring of “technical” lawsuits. As a result, while holding secret meetings was certainly illegal, since the lawsuit was not brought until the practice stopped, the Court ruled in favor of the Association and its current Board Members.

It is important that owners not be discouraged from bringing lawsuits if true misappropriation or self-dealing has taken place, or other wrongdoing is ongoing. However, bringing a case based on pure speculation, disagreement with the Board, or technical violations of past boards is not something the courts are willing to entertain, and owners need to think twice before suing their Boards without the benefit of valuable forethought and sound legal strategy.

1 comment:

  1. I have checked pretty carefully into the definition of breach of fiduciary duty and self-dealing, and I sometimes question what is allowed and what isn't. I am a homeowner, and the Board President has a contract for monitoring the pool, pool supplies, janitorial supplies and services. The Vice President, with knowledge of the bid of the prior landscape company, conveniently submitted a lower bid, and thus awarding himself the contract. The Treasurer seems to conveniently have overlooked all this. Does this fit the description of self-dealing?