Fiduciary Duty

The board of managers of a condominium owes a fiduciary duty to treat fairly and act in the best interest of all unit-owners. This principle was recently reaffirmed in Michaelson v. Albora where the court disapproved disparate treatment of unit-owners on the sale of a part of the common elements.

The parties in this case were for the most part the owners of units in a commercial condominium complex. In late 1994, defendants Paul R. Slayton and The Slayton Group sought to purchase an uncompleted portion of the condominium premises known as "Cluster C" to develop in conjunction with adjoining property that they owned. In order to accomplish this, Slayton needed the consent of each unit-owner. He contacted each owner by letter, offering compensation between $10,000 and $12,000 for the transfer of their common interest. The defendants refused the initial offer and negotiated their own compensation. Paul Albora received an additional $52,500, and S. Randall Goat received an additional $50,000. At the time of the negotiations, Albora and Goat were members of the condominium's board of managers.

In 1997, plaintiffs began this action against Nancy Albora and Goat for an accounting because of a breach of their fiduciary duty by negotiating to receive the additional payments (the first cause of action) and for an accounting because of their status as agents of the unit-owners (the second cause of action); against Nancy Albora, Goat, Slayton, and The Slayton Group, for fraud in misrepresenting their negotiations to the other unit-owners (the third cause of action); and against Paul and Nancy Albora, Goat and Richard Ruffner for an accounting because of their status as unit-owners (the fourth cause of action).

The defendants argued that the cause of action for breach of a fiduciary duty should fail because neither Nancy Albora nor Goat were acting as members of the board of managers during the negotiations and therefore did not have any such duty; that their position on the board did not automatically make them agents of the other unit-owners; that the deposition testimony did not support a finding that they misrepresented to the unit-owners that they intended only to negotiate collectively with Slayton or that they induced the unit-owners not to negotiate individually with Slayton; and finally, that co-owners of units did not legally owe each other a duty to account.

Plaintiffs did not object to the dismissal of the second cause of action for an accounting because of agency status. Accordingly, the second cause of action was dismissed. However, the plaintiffs argued that members of the board breached their fiduciary duty when they engaged in self-dealing and financial self-aggrandizement. The letter agreements with Slayton concerning the additional payments signed by Nancy Albora and Goat were offered as evidence of such conduct.

Regarding the fraud, the plaintiffs argued that there was testimony to support a finding that at the board meeting, there was an agreement that the owners would negotiate in concert with Slayton through Steve Fuchs. The fact that the agreements made by the defendants with Slayton were to be kept confidential in the view of the plaintiffs supported a finding of an intention to mislead and detrimental reliance by the others on the agreement to bargain collectively.

Clearly, said the court, the law provides that members of the board of managers of a condominium owe a fiduciary duty to the owners of the units when engaged in the business of management. Since the members of the board are either sponsor-owners or unit-owners, their personal interest may conflict with that of the common interest. Under such circumstances, any board member must gear his or her conduct to benefit his or her own self-interest or that of the sponsor.

The bylaws are the vehicle by which unit-owners forego certain individual property rights and delegate them to a board of managers. They spell out the limits of the board's authority to act. One area in which the board of managers is given broad authority to act is in the maintenance and repair of the common elements of the condominium. While there are no provisions in either the condominium by-laws or the real property law concerning the sale of the common interest, several provisions relate to a change in the ownership of the common interest. These include:

(1) The condominium bylaws at Article XII, which provides:

"In the event all or part of the common elements are taken in condemnation or eminent domain proceedings, the award from such proceedings shall be paid to the Insurance Trustee if the award is more than $50,000 and to the Board of Managers if the award is $50,000 or less, to be distributed in accordance with Section 3 of Article VII as follows: So much of the award as is applicable to common elements, to the Unit Owners pro rata according to the respective percentages of common interests appurtenant to the Units owned by such Unit Owners."

(2) Real Property Law, Section 339-I (2), which states: "The Common interest appurtenant to each unit as expressed in the declaration shall have a permanent character and shall not be altered without the consent of all unit owners affected, expressed in an amended declaration. However the declaration may contain provisions relating to the appropriation, taking or condemnation by eminent domain by a federal, state or local government, or instrumentality thereof, including, but not limited to, reapportionment or other change of the common interest appurtenant to each unit, or portion thereof, remaining after an appropriation, taking or condemnation."

(3) Real Property Law, Section 339-t, which states: "If the withdrawal of the property from this article is authorized by at least eighty per cent in number and in common interest of the units, or by at least such larger percentage either in number or in common interest, or in both number and common interest, as may be specified in the by-laws, then the property shall be subject to an action for partition by any unit owner or lienor as if owned in common, in which event the net proceeds of sale shall be divided among all the unit owners in proportion to their respective common interests..."

Accordingly, the court concluded that the intent of the condominium bylaws and statute were that, upon the loss of the common interest appurtenant to their unit, unit-owners should be compensated in proportion to the pro rata value of their unit.

The deposition testimony and affidavits presented suggested that there were discussions and a vote at a unit-members' general meeting that Steve Fuchs would represent the unit-owners as opposed to the sponsors in negotiating a deal with Slayton and report back to the board and the unit members.

Such testimony was contradicted by Fuchs' affidavit. The deposition testimony further established that the receipt of the additional funds by the Alboras and Goat was to be concealed from the other owners. It was also clear from the testimony that the meetings of the members and the board were informal at best and that they may have been held simultaneously.

The crux of the plaintiffs' argument was that because there was no resolution, contract or writing concerning the oral agreement, the members of the board had not in fact acted. However, the bylaws state at Article II, Section 5(c)(8)(d) that: "At all meetings of the Board, a majority of the managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and an act of the majority of the Managers present at any meeting at which there is a quorum shall be the act of the Board of managers"

Article II Section 5 cited by the plaintiffs required a resolution of the board for the creation of a committee to exercise the power of the board. In the court's view, it was not applicable here. Contrary to the defendants' argument, it was clear that the board may not act without a resolution.

Thus, the court found that Nancy Albora and Goat had a fiduciary duty to act in a manner that would benefit the unit-owners as a group with regard to the sale of their common interest to Slayton. Whether each of them acted or failed to act in a manner which breached that duty remains a question of fact said the court. Further, the court found there were issues of facts concerning the elements constituting a cause of action for fraud, including a material misrepresentation made with intent to deceive and detrimental reliance. However, the fourth cause of action was dismissed by the court, as there was no legal or fiduciary duty that one unit owner account to another unit-owner.

Accordingly, judgment was granted only to the extent that the second and fourth causes of action were dismissed, but the action continued on to the first and third causes of action.

Comment: The case illustrates the fiduciary duty of board members that is owed to both co-op shareholders and condo unit-owners when it comes to business dealings. A board cannot permit some unit-owners to get a "better" deal than others. If this happens, legal recourse is available, swift and unsympathetic.