Article Archives >> Lead Stories >> April 16-May 15, 2011

Director Liable to Association
For Breach of Fiduciary Duty
Director-manager charged unauthorized fees,
used funds for personal benefit, falsified records

A member of the board of directors of a nonprofit condominium association who also managed the association has been found liable for breach of duty to the association and ordered to pay damages and the association’s attorney fees.  An appellate court has affirmed a trial court decision it said was supported by competent, credible evidence.  (Mauger v. Inner Circle Condominium Owners Association, Ct. of App., OH, No. 10CA0046, 3/31/11.)

In 2004, the Association hired M2 Management Corporation, which was owned and operated by the president of the Association’s board, to serve under a 5-year contract as its general manager.  It agreed to pay $3000 a month for management services plus reimbursement for any “materials or supplies” that M2 purchased for its benefit.  The president testified that he asked the other directors if they would like M2 to take on additional responsibilities in exchange for an additional labor fee, they agreed, and he did the work and charged more. 

In 2007, when finances became tight and a special assessment was required to replace some railings on the building, some members pressured the board to scrutinize its expenses.  Noticing that the Association was paying more than $3000 a month, the board asked for a breakdown, but did not get a satisfactory response.

The board had a particularly stormy meeting with the president about the finances, at which several directors said the president resigned, and the president said he was voted off the board.  In pursuing the numbers, the board concluded that they were paying for labor that they had not agreed to pay for, that the president had used Association funds to pay for a property survey for a personal unit, and that he had purchased a car from a member, not for cash but for payment of the special assessment.  Records showed that the assessment was marked paid, but there was no evidence that it had been actually paid.

The president sued to be restored to the board, and the Association counterclaimed against M2 and against the president for breach of fiduciary duty.  The trial court found for the Association and also granted attorneys’ fees.  On appeal, the president essentially argued that the holding was against the weight of the evidence.

The Court of Appeals said the decision had to be upheld if it was supported “by some competent, credible evidence going to all the essential elements of the case” and found such evidence in the trial record.

On the issue of unauthorized charges, the president argued that he had discussed it with other members of the board and that they had paid the bills without objection for several years.  But one of the directors said the board had not discussed the charge and that they assumed the extra costs were for authorized materials and supplies.  The Court of Appeals said the trial court was within its discretion in finding the director’s testimony more credible than the president’s.  It also noted that the president’s repeated failure to provide the board with complete financial records led to the inference that the charges were unauthorized.

Again citing conflicting testimony and the president’s lack of documentary evidence, the Court affirmed the findings that the president breached his fiduciary duty to the Association when he failed to pay for the survey and the other member’s assessment. 

On the issue of attorneys’ fees, the Court noted the general “American rule” in which each side pays its own legal fees unless shifting is specifically authorized by a statute.  It noted exceptions, however, where authorized by contract or “when the prevailing party demonstrates bad faith on the part of the unsuccessful litigant.”

Although bad faith is a “somewhat indefinite term,” the Court said, “it imports a dishonest purpose or some moral obliquity.  It implies conscious doing of wrong.  It means a breach of a known duty through some motive of interest or ill will.  It partakes of the nature of fraud.”  The trial court had found that the president’s “self dealing violated [the Association’s] by-laws and his duty not to act in bad faith.”  The Court of Appeals concluded that the finding of bad faith was supported by competent evidence.

YOU NEED TO KNOW

A director transacting business with his or her own organization should learn from this case the value of documentary evidence and clear board minutes authorizing work or changes in work for which the director expects to be paid.  Assuming that the president in this case had actually discussed the extra labor charges with members of the board, he should have been sure to have it recorded in the board minutes.  The lack of such a record, when the event is denied by directors now angry with him, clearly creates the inference that the event didn’t happen.  Where it is he said versus she said, and one doesn’t have documentary evidence that would normally be provided, the one without the documents is very likely to lose.

 

Article Archives >> Lead Stories >> April 16-May 15, 2011