Condo Media - February 2015 - 40

The Region

RHODE ISLAND

No Detours to the Casino

Rhode Island's Prudent Investor Act Establishes a Duty of Loyalty
[by Frank A. Lombardi, Esq.]

Whether our office is foreclosing
on a condominium unit assessment lien or is dealing with a unit
owner's lender foreclosing on its
mortgage, we are often asked
whether the association can bid at
the auction and purchase the unit.
The association is given powers under
the statute and pursuant to its governing documents to purchase the unit at
auction, and if necessary, to finance the
purchase with a mortgage loan or by
drawing from its reserve account(s).
The question becomes especially
relevant when the condominium's
governing documents provide for a
right of first refusal in the event of
an assessment lien or mortgage lien
foreclosure, which in that event can
give the association a "leg up" over
other investors at the lien auction.
That is, say an investor at an auction
has the winning bid of $50,000 on a
unit. The association would typically
have 30 days within which to exercise
its option to purchase the unit for the
winning bid price. The question at this
point is not whether it can buy it but
should it?
The Rhode Island Condominium
Act indicates that an executive board
elected by unit owners is required to
exercise the standard of ordinary and
reasonable care in deciding how to
operate and manage the condominium.
That would include deciding whether
to withdraw money from a reserve
account to purchase a unit. Rhode
Island's Prudent Investor Act which,
although not specifically referring to
association board members, does deal
with trustees who hold money for others in trust, just like executive board
members do.

40

CONDOMEDIA

Does an executive board invest or
not? The Prudent Investor Act asks the
board simply, would a board member
buy it for himself given his mission?
That is, a prudent investor "shall
use the judgment and care under the
circumstances then prevailing that
persons of prudence, discretion, and
intelligence exercise in the management of their own affairs, not in regard
to speculation but in regard to the
permanent disposition of their funds,
considering the probable income as
well as the probable safety of their
capital 18-15-10."
So, here is the question facing the
board: Having been entrusted with reserve funds for capital improvements,

such as a major roof replacement or
parking lot resurfacing, should it veer
off its saving plan for the funds and
invest for what would hopefully be a
bigger payout, or should it play it safe,
slow, and steady? But you say, here
in the form of a right of first refusal,
the board has an opportunity to make
some real money by buying a unit at
below fair market value. They could
buy it, fix it up, and sell it, or even rent
it. But should they?
Before making the decision, the
board, again like the trustee of a trust
should consider the following standard
concerns established by Rhode Island's
Prudent Investor Act, including but
not limited to the following:
Condo Media - February 2015

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