Understanding Fiduciary Duties: Key Takeaways From Recent Court Cases

A board’s best friend is the business judgment rule, which protects directors from liability for decisions made in good faith, within their authority, and in the best interest of their building. When those requirements aren’t met, a board can run into legal headaches, which is what happened at a Westchester condo over its decision regarding a lease for cell towers.

CASE IN POINT. The board had signed a lease with a cellphone company allowing it to install cell towers on the building’s roof. Residents challenged the decision, arguing that the board had acted outside the scope of its powers under the bylaws and declaration. Board members had acted with what they believed was good intent, thinking the lease would provide financial benefits to the condo. But the court ruled against the board, concluding that placing cell towers on the roof, which are part of the common elements, wasn’t for the benefit of residents but for the public at large. It found that the decision to sign the lease was invalid, and the board had to invalidate the lease.

SENSITIVE SITUATIONS. The case illustrates the importance for boards to consider whether a decision follows the business judgment rule before taking action. That is especially important with eviction situations. For example, a shareholder is making excessive noise and the board votes to terminate the proprietary lease. Has the board followed proper practices by looking into the situation, sending letters, having meetings and exhausting other options available to them? If not, it could indicate the decision was not made in good faith.

Another example would be a decision about a building contract where the board got advice from its managing agent or from an engineer or architect, but something goes amiss and the board is sued by residents. Is the fact that they reached out to professionals enough to protect them under the business judgment rule. It’s certainly going to help them. But if, say, the contractor hired was a cousin of the board president,  that’s going to shift things the other way. Even if they relied on reasonable advice ot professions and acted within the scope of their authority, the decision could be seen as involving a special relationship and therefore not in good faith.

THE TAKEAWAY. Before coming to any decision, boards should consult counsel to make sure they are acting reasonably and fairly, and have followed their rules and procedures. If they start early on in the process, we can sit down with the board and walk them through it. You don’t want to open yourself up to a business judgement rule inquiry and allow the court to scrutinize your decision.