Condo Media - May 2013 - 53

your pocket,” Glenn Montgomery, vice
president and co-founder of Brownstone Insurance, suggests. It’s a highrisk and unnecessary exposure that
board members don’t want to incur.

Legal Precedents: The
Business Judgment Rule

Legal precedents — specifically, the
“business judgment rule” — provide
another layer of protection shielding
trustees from personal liability. Under this legal precept, courts will not
second-guess the actions of a corporation’s directors as long as they are undertaken in good faith and consistent
with what the directors believe to be
in the best interests of the corporation.
This is known informally as the “good
heart, weak mind” theory — decisions
can be wrong, unwise, inexpedient,
and even stupid; as long as they are not
reckless or willfully negligent, trustees
will not incur personal liability for any
problems their decisions may create.
Montgomery notes, as an example,
the decision many boards made not
to buy flood insurance for Vermont
condominium communities located
in areas that had never experienced
flooding before. Many of those
properties suffered massive flood
damage from Tropical Storm Irene,
making the insurance decision appear
in retrospect to be ill-advised, if not
irresponsible. But those boards had
sound reasons for acting as they did,
Montgomery says. They were wrong,
but they weren’t reckless nor willfully
negligent.
Attorneys differ somewhat in their
assessment of the extent to which
the business judgment rule applies to
condominium boards. Goodman thinks
the rule covers the directors of corporations but not the trustees of unincorporated condominiums structured as
trusts, which describes most community associations in Massachusetts.
“Although some lower court decisions have applied the rule to the actions of a board of trustees,” Goodman
notes, “the Massachusetts Supreme Judicial Court has not yet accepted that.”

The applicable standard, he contends,
is fiduciary duty — a trustee’s obligation to act always in the best interests
of the association, fulfilling both a
duty of care (making well-reasoned,
well-informed decisions) and a “duty
of loyalty” — putting the association’s
interests above their own.
Other attorneys think trustees, like
corporate directors, can rely on the
business judgment rule. Whether they
are organized as corporations or as
trusts, courts view condominium associations as “quasi-corporate entities,”
Daniel Polvere, a partner in MPD Law,
LLC, contends. As long as the trustees
act in good faith and “in a business-like
way,” he believes, the business judgment rule will apply. “The courts will
view them as volunteers who are doing
the best they can,” even if their best
efforts turn out to be inadequate or
wrong.
Whether under the business judgment rule or the fiduciary standard, the
bottom line for trustees will be pretty
much the same, Polvere and Goodman agree: Indemnification and D&O
insurance provide fairly comprehensive
protection against personal liability. “As
long as board members aren’t acting
in a manner that is reckless or knowingly and intentionally wrongful or
criminal,” Goodman says, “they need
not fear any personal loss due to their
actions as unpaid volunteers.”
Polvere makes the same point: “If
you’re not stealing money, letting others steal money, or just sleepwalking
through your job,” he says, “you’re
going to be OK.”

Exclusions and Exceptions

But the “as-long-as-you’re-notdoing-this” exceptions that Polvere
and Goodman note make the liability
shields for trustees potentially porous
— strongly leak-resistant, but not
completely water-tight. Indemnification provisions and D&O policies typically exclude actions that are criminal,
willfully wrong, knowingly not in the
association’s best interests, reckless,
“grossly negligent,” or outside the

purview of the trustee’s role.
The last item on that list is particularly important. A trustee who makes
repairs — badly — on his unit, resulting in damage to another unit or the
common area, could not tap the D&O
policy for defense costs, Moskowitz
notes, because the repair work was
unrelated to his job as a trustee.
The board president who cheerfully calls “Hi, Babe” to a young staff
member every day, tells her she “looks
great” in her uniform, and gets hit with
a sexual harassment suit as a result also
won’t have D&O coverage, Meskin
says, because “he’s not acting in his
capacity as a board member.”
Goodman offers an even more colorful example of a board member operating outside — well outside — the
trustee’s role. This trustee (“Let’s call
her Bambi,” Goodman says) invited
the head of the association’s landscaping crew to her unit for lunch. When
he rang the bell, she greeted him in the
nude, saying, “I’m lunch. I hope you
like what’s on the menu.”
An affair ensued, which the landscaper’s wife discovered and about
which she was not pleased. The landscaper quit (he said he had no choice)
and insisted that he felt compelled
to accept the trustee’s invitation,
because he feared losing his job if he
refused. He was going to file a sexual
harassment claim against the board
and the trustee, but was persuaded
to accept what Goodman describes
as a “generous” severance package
instead.
Had this board member been sued
individually, she almost certainly would
have lost, Goodman says — and, because she was not acting in her capacity
as a trustee, she would have been naked
once again, this time stripped of the
indemnification and insurance coverage
she would have needed to shield her
from liability.

Watch Your Step

Boards and board members sometimes
stumble unwittingly and with the best
of intentions outside of their liability
Condo Media • May 2013

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Condo Media - May 2013

Table of Contents for the Digital Edition of Condo Media - May 2013
