Boards protected from personal liability

Directors and officers of a board of directors are subject to the same protections and same exposure as other directors of corporations. Fortunately, the veil of protection is a lot thicker than the risk of personal liability.

The "business judgment rule" is that courts will not interfere with the business decisions made in good faith by the directors of a corporation so long as it is within the scope of its authority. Boards of directors will be insulated in their decision-making and shielded from judicial second-guessing. (See Levandusky v. One Fifth Ave. Apartment corp.., 553 N.E. 2nd 1317 (N.Y. 1990) "Courts should review business decisions of a corporation only for fraud, bad faith, self-dealing, unconscionable conduct, gross overreaching, or abuse of discretion." (See Willens v. 2720 Wisconsin Ave. Cooperative Assoc., 844 A. 2d 1126 (D.C. 2004)

This seems like a fairly easy checklist of behavior that would constitute a breach of fiduciary duty and as in all cases requiring legal analysis, things are not as easy as they appear. First, it is a question of what constitutes an abuse of discretion. Does a board voting to close the swimming pool do to a shortfall in the budget due to emergency repairs constitute an abuse of discretion, or the self-employed manager being told by the president to pay some personal expenses out of the operating account to make up for unpaid overtime? There is not always a black and white answer.

It has been the law in Illinois that the directors of a corporation shall exercise a duty of care required of a fiduciary to its shareholders (and in the condominium act, to the unit owners). In most instances when a lawsuit is filed against an association board, you will see an allegation of breach of fiduciary duty. The business judgment rule is a defense to this theory. Section 108.60 and 108.70 of the Illinois General Not for Profit Corporation Act address the parameters of director conflict of interest and limited liability of directors and officers. This act sets an even higher bar for allegations of breach of duty as the standard in paragraph (a) is willful or wanton conduct.

Thus, the law even protects a director from being stupid or acting negligent. The clear-cut breach is intentional misconduct; conduct which may shock the conscience of the court. Forgetting to send out the budget until 10 days before the meeting is neither willful nor a breach of fiduciary duty. (Unless the responsible party intends not to send it out so people will not have enough time to digest it.)

The second point is, that courts do apply a reasonableness standard to board activities and just like the abuse of discretion does involve judicial discretion. The court gets to decide what "reasonable" means.

One of the first orders of business of a newly elected board should be to make sure directors and officers insurance is in place and have a basic understanding of what is covered and what is not. for example, most director and officer policies do not cover the defense of an action for an injunction, only one seeking monetary damages. In actuality, the greatest risk the association faces in a lawsuit is not so much in the likelihood of losing as much as having to pay out large sums for defense of the claim. If the lawsuit is not covered by insurance, this can create a huge financial burden. That is why many insurance companies will try and settle a lawsuit against the board quickly, in order to preserve costs, sometimes when the suit seems to have little or no merit.

Third, board members always have a concern as to whether they can get sued for their role on the board. The truth is, that board members are often named personally in suits against associations. The good news is that unless the conduct involves intentional or willful misconduct, the insurance company will pick up the defense of directors acting within the scope of their authority as well as the association. Cases that involve personal issues frequently involve slander and liable, or battery which are personal intentional actions, misappropriation of funds or unfortunately, allegations of civil rights violations.

In these instances, the owner must rely on the statutory provisions as aforementioned plus the indemnification provisions in the declaration and bylaws.

There are some simple guidelines to avoid having to accept a summons or having a dialogue with an insurance adjuster:

• If board action involves interpreting a document, contract or communication from a lawyer, call the board attorney.

• If there is any doubt as to whether you should make a decision because it is wrong, it probably is.

• In all instances involving the expenditure of association funds, send proper notice and communicate efficiently.

• When taking action against any owner, make sure you have sufficient records, documents and evidence in order to win the case.

• Anytime you make something personal, you will either get sued or removed.