Board of Directors: FIDUCIARY DUTIES

1
Board of DirectorsFIDUCIARY DUTIES

• (Or, How to Avoid Legal Trouble)

2
A Boards Role

• Governing Body for its Association
• Comprised of Directors
• Directors are voted in by Members (a.k.a. Owners)
• Directors then vote for Officers (i.e. President,
  Vice President, Secretary, Treasurer)
• Owners do NOT vote for Officers
• Each Director serves for a set term
• Has general Decision-Making Powers
• RECEIVES NO PAYCHECK!

3
Selection of the Board

• By-Laws sets forth rules for
• Eligibility of Owners to become Directors
• Delinquent Owners are usually NOT eligible to run
• Number of Directors
• Terms of Directors and Officers
• Quorum for meetings
• Voting at meetings
• Removal and Resignation of Directors and Officers
• Must ensure the Board is legally elected before
  putting any matter to a Vote!

4
Power to Make Decisions

• Board makes MOST decisions for its Association,
  such as for
• Collections
• Architectural Control
• Maintenance
• Common Areas and Parking
• Easements and Licenses
• Budget and Assessments
• Leasing
• and many more set forth in the Documents

5
But there are Limits to this Power

• Boards MUST act
• in Good Faith
• with the Care of an Ordinary Prudent Person, and
• in the Best Interest of the Association.
• These are the Boards
• FIDUCIARY DUTIES

6
Sources of Duties

• Maryland Law/Statutes
• Condominium Act
• Relevant case law
• Your Associations Documents
• Declaration or Master Deed
• By-Laws
• Any other recorded Rules and Regulations

7
(No Transcript)
8
MD Condominium Act

• Closed Meetings of the Board
• (MD Real Property Article, 11-109.1)
• Dispute Settlement Mechanism
• (MD Real Property Article, 11-113)
• Conducting hearings of Owners in violation of
  Associations rules
• Notice requirement for hearing
• Adjudicating the hearing
• Sanctions

9
Confidential Association MattersExecutive
Sessions

• Board Meetings MUST be CLOSED when
• Discussing matters of employees and personnel
• Protecting privacy/reputation of individuals in
  matters not related to associations business
• Consulting with legal counsel
• Consulting with staff personnel, consultants,
  attorneys, or other persons in connection with
  pending litigation
• Conducting investigative proceedings concerning
  possible or actual criminal misconduct

10
Executive Sessions (contd)

• Board Meetings MUST be CLOSED when
• Complying with a specific constitutional,
  statutory, or judicially imposed requirement
  protecting particular proceedings from public
  disclosure
• Held on an individually recorded affirmative vote
  of two-thirds of the board members present, for
  some other exceptional reason so compelling as to
  override the general public policy in favor of
  open meetings (Repealed 10/2009)
• Otherwise, ALL other meetings must be OPEN

11
Associations Governing Documents

• DECLARATIONS often set forth rules regarding
• Architectural Control
• Maintenance responsibilities
• Use Restrictions
• Budget/Finances
• Assessments
• Insurance
• Overall legal rights

12
Associations Governing Documents

• BY-LAWS often set forth rules regarding
• Meetings of Members
• Board of Directors Business
• Selection, Terms of office, Removal
• Eligibility, Nomination and Election
• Meetings of Directors
• Powers and Duties
• Officers Duties
• And other provisions already established in the
  Declaration

13
Beyond the Legalese

• Remember, a Board must perform its legal duties
• in Good Faith
• with the Care of an Ordinary Prudent Person, and
• in the Best Interest of the Association.

14
Good Faith

• All Directors are volunteers, and cannot receive
  compensation for their work
• This means NO
• Gifts
• Incentives
• Monetary reward of any kind!
• Accepting or taking compensation is a violation
  of the Duty of Good Faith
• May be reimbursed for out-of-pocket expenses, but
  only with proof of payment

15
The Associations Best Interest

• Decisions must be made for the Community as a
  whole
• Some decisions may not benefit every individual
  member
• Cannot act against any individual members
• Dont be an Interested Director
• Fully Disclose any personal interests
• For example, dont encourage the rest of the
  Board to award a contract for your friend or
  family member without first fully disclosing your
  personal interest
• Keep Association matters Confidential

16
Electronic Communications

• Duty of Confidentiality arises
• Electronic Communications any form of
  communication, not directly involving the
  physical transmission of paper, that creates a
  record that
• May be retained, retrieved, and reviewed by a
  recipient of the communication, and
• May be reproduced directly in paper form by a
  recipient through an automated process
• Specific Laws in the Condo Act
• Electronic Transmission of Notice
• Electronic Transmission of Votes or Proxies

17
Electronic Communications (contd)

• Electronic Transmission of Notice
• (MD Real Property Article, 11-139.1)
• Despite language in the associations governing
  documents, the association may provide notice of
  a meeting or deliver information to an owner by
  electronic transmission, IF
• 1) the Board gives the Association the authority
  to provide notice of a meeting or deliver
  information by electronic transmission
• 2) the Owner gives the Association prior written
  authorization to provide notice of a meeting or
  deliver information by electronic transmission
  and
• 3) an Officer or Agent of the Association
  certifies in writing that the Association has
  provided notice of the meeting or delivered
  material or information as authorized by the
  Owner.
• Electronic Notice is ineffective if the
  Association is unable to send two consecutive
  notices and is aware of this inability
• Inadvertent failure to deliver notice by
  electronic transmission does not invalidate any
  meeting or other action

18
Electronic Communications (contd)

• Electronic Transmission of Votes or Proxies
• (MD Real Property Article, 11-139.2)
• Despite language in the governing documents, the
  Board may authorize Owners to submit a vote or
  proxy by electronic transmission if the
  electronic transmission contains information that
  verifies that the vote or proxy is authorized by
  the Owner or the Owners proxy
• If the governing documents require voting by
  secret ballot and the anonymity of voting by
  electronic transmission cannot be guaranteed,
  voting by electronic transmission shall be
  permitted if Owners have the option of casting
  anonymous printed ballots

19
ConfidentialityElectronic Communications

• Are my e-mails confidential?
• Yes (generally!)
• Protected from disclosure under the
  Attorney-Client Privilege
• Reasonable Expectation of Privacy
• no need for encryption
• BUT, be cautious
• Double-check the recipients
• Compose new messages for different subjects
• Keep Board matters to the Board, only!

20
ConfidentialityElectronic Communications

• What About Inadvertent Disclosure?
• E-mails can be intercepted, maliciously
  disseminated (e.g. virus), or sent inadvertently
  to the wrong person (e.g. the False Keystroke)
• Majority approach Inadvertent disclosure does
  NOT waive the Privilege
• Your e-mail would still be protected
• UNLESS you voluntarily share it!

21
ConfidentialityElectronic Communications

• Did my inadvertent disclosure waive the
  Attorney-Client Privilege?
• Factors to Consider
• Reasonableness of the precautions taken,
• Time taken to rectify the error,
• Scope of discovery,
• Extent of disclosure, and
• The overriding issue of fairness

22
ConfidentialityElectronic Communications

• Legal Protections of the Attorney-Client
  Privilege
• Federal Communications Act
• Doesnt explicitly address electronic
  communications, but prohibits unauthorized
  publication or interception of radio or telephone
  communications
• Electronic Communications Privacy Act
• Illegal to intentionally intercept any electronic
  communication
• American Bar Associations opinion
• Attorney may send confidential information to
  Client via unencrypted e-mail without violating
  the ethical obligation to protect information
  relating to representation of Client
• Case Law

23
Keep it Confidential

• Electronic Communications can lead to error and
  increase the spread of confidential info
• Follow the law regarding electronic notice and
  voting. Do not implement unless a system is
  developed for tracking and verification
• E-mail communications between Board members on
  business matters should stay within the Board
  ONLY
• Keep a written record of all Board decisions do
  not rely on e-mail alone
• When in doubt call your Attorney, or write an
  old-fashioned letter
• And, keep personal business out of Board e-mails!

24
Ensuring Duties are MetSmall Things Big
Difference

• Stay Informed
• Familiarize yourself with your Governing
  Documents
• Review your monthly management reports,
  especially bank statements
• Stay Involved
• Work closely with management to determine the
  Associations budget
• Raise or Lower Assessments based on the
  Associations demonstrated financial needs
• Eliminate unnecessary expenses
• Oversee any Agent of the Association

25
Small Things Big Difference (contd)

• Ask for Help!
• Management Company
• Choose your Management based on its
• experience, references, certification and costs
• Certified Professional Accountant (CPA)
• Attorney
• Previous Board Members
• Formulate Committees
• Architectural Control
• Rules Enforcement
• Contact free and low-cost resources
• Community Associations Institute (CAI)
• County and State agencies
• Boards duty does not end at delegation
• Review the Associations Agents
• Work with Agents to ensure Associations
  interests are met

26
Additional Protections

• Insurance
• MD law permits the indemnification of directors
  unless they act unlawfully, with gross
  negligence, or deliberate dishonesty
• Director/Officer Liability Coverage
• Insures the Association against the negligence or
  misconduct of Directors
• Protects individual Directors from actions
  against the Association

27
(No Transcript)
28
And Remember

• Associations cannot function successfully without
  ACTIVE BOARDS
• Boards must be willing to undertake
  Responsibility and Hard Work
• The Goal of helping your community remain a
  desirable place to live!

29
For More Information

• Linda S. Mericle, P.A.
• 6404 Ivy Lane, Suite 408
• Greenbelt, MD 20770
• [phone]
• linda.mericle_at_verizon.net